The turnover of ETFs in the Hong Kong market has reached record highs

China Fund News reporter Zhao Xinyi and Ye Shijie

Despite the ups and downs in 2023, Hong Kong's ETF market has emerged amid many challenges. According to the website of the Hong Kong Stock Exchange, the exchange-traded products (ETPs) market, including ETFs, has shown a steady growth momentum, with record turnover and a richer product variety.

According to industry analysts, Hong Kong's ETF market has become one of the most diversified markets in Asia, investors can get involved in the global equities, fixed income and commodity markets with different investment strategies, and Hong Kong is one of the world's leading financing centers.

The daily turnover reached a record high, and the types of ETF products in the Hong Kong market have become increasingly diversified

According to data from the Hong Kong Stock Exchange, the daily turnover of Hong Kong ETFs reached HK$14 billion, up 16.9% year-on-year, hitting a record high, and the net inflow of funds also reached HK$57.1 billion, up 25.5% year-on-year.

Regarding the performance of the Hong Kong ETF market in 2023, Huajin Securities analyzed that the increased demand for ETF products by investors is one of the main reasons for the record daily turnover. Specifically, ETFs are a convenient, flexible and diversified investment tool that can provide broad market exposure to specific asset classes, sectors or geographies. Domestic investors can access investment opportunities in the global market through ETFs to achieve asset allocation and risk diversification. As an international financial centre, Hong Kong has attracted the attention of a large number of foreign investors. Foreign investors may also choose to access investment opportunities in Asian markets through Hong Kong's ETF market, including assets such as stocks and bonds in Chinese mainland and other Asian regions.

The Hong Kong ETF market also continues to diversify its product offerings. According to the data of the Hong Kong Stock Exchange, a total of 16 products will be listed in 2023. By the end of the year, the total number of products reached 174. Among them, CSOP Saudi Arabia ETF has attracted much attention from the market, with a net inflow of more than HK$7.8 billion in the first month of listing, becoming the new product with the largest capital inflow in 2023. Listed on 29 November 2023 with over HK$8 billion in assets under management, the ETF is not only the world's largest Saudi Arabian ETF, but also the first ETF to launch its kind in the Asia-Pacific region.

(List of newly listed ETF products in the Hong Kong market in 2023 Source: HKEX website)

CSOP told this reporter that the company is looking for assets with growth potential in the global market, especially in the "Belt and Road" countries, to help investors broaden their cognitive boundaries and investment horizons. In June 2023, CSOP launched the CSOP iEdge Pan Southeast Asia Technology Index ETF (SQQ) in Singapore, the world's first ETF focusing on the technology sector in Southeast Asia and India, and the first Saudi Arabian ETF in Asia in Hong Kong in November 2023, raising more than US$1 billion (about HK$8 billion), becoming the world's largest Saudi ETF.

In terms of investment themes, ESG ETFs remain one of the bright spots in the Hong Kong market, with two new products added last year, bringing the total number of ESG ETFs listed in Hong Kong to 11. In the fixed income sector, the Hong Kong market welcomed the listing of four money market ETFs in the past year, bringing the total number of money market ETFs listed on the Hong Kong Stock Exchange to 10. At the same time, the Hong Kong fixed income ETF market also ushered in the first bond ETF with a stable monthly dividend distribution as its investment objective, namely the Global X Asian USD Investment Grade Bond ETF.

ETF Connect continues to expand

Steady development

Since its official launch in 2022, ETF Connect has been steadily expanding and trading has gradually become active over the past year. According to HKEX data, as of the end of 2023, the number of southbound and northbound ETFs was 8 and 131 respectively. In 2023, the average daily turnover (including buying and selling) of Southbound ETFs reached HK$2.7 billion, an increase of 197% compared to 2022, and reached an all-time high of HK$4.6 billion in June 2023.

It is worth noting that southbound ETF trading accounted for more than 11% of Hong Kong's ETF turnover last year, which is reflected in the rising demand for diversification among mainland investors, according to Lo Boren, head of securities product development at HKEX.

According to the analysis of Huajin Securities, the "ETF Connect" makes it more convenient for domestic investors to obtain investment opportunities in the global market. Domestic investors can directly purchase overseas ETF products through ETF Connect to obtain investment returns and risk diversification in overseas markets. Second, ETF Connect will also help promote the opening up and reform of the mainland's capital market. Through the introduction of overseas ETF products, we will increase the investment varieties and competition in the mainland market, and improve the efficiency and vitality of the market. At the same time, it also enhances the linkage and interaction between the mainland capital market and the international market.

For the future development of "ETF Connect", Huajin Securities believes that this new trading mechanism will provide investors with more investment choices and continue to introduce more overseas high-quality ETF products to meet the needs of different investors. By increasing investment options, we can improve market competition and quality, reduce costs, and improve investment returns, and there is still a lot of room for development in the future.

However, Huajin Securities also mentioned that investor publicity and education should continue to be strengthened, and investors should improve their understanding of overseas ETF products, help investors understand the characteristics and risks of overseas ETF products, so as to make investment decisions in line with their own risk appetite.

CSOP said that in 2024, it will deepen the interconnection and actively participate in mechanisms such as "ETF Connect", "ETF Mutual Listing" and "Greater Bay Area Wealth Management Connect", so as to give full play to Hong Kong's role as a "super connector" and "super value-added person", and bring richer asset allocation tools to domestic and foreign investors.

Hong Kong became the first in Asia

The market that allows the listing of virtual asset spot ETFs

In 2023, Hong Kong became the first market in Asia to allow the listing of virtual asset spot ETFs. A few days ago, it was reported that Harvest International, a subsidiary of Harvest Fund, had submitted an application for a Bitcoin spot ETF to the Hong Kong Securities and Futures Commission (SFC) in January 2024, becoming the first institution in Hong Kong to submit an application for a Bitcoin spot ETF.

In fact, on 22 December last year, the Hong Kong Securities and Futures Commission (SFC) updated the Joint Circular on Virtual Asset-related Activities of Intermediaries, making it clear that it is "ready to accept applications for spot virtual asset ETFs", ahead of the SFC. HKEX's Head of Securities Product Development, Mr Lo, also pointed out at the time that HKEX is ready to seize the opportunities presented by thematic investments and will work closely with issuers and various stakeholders to smoothly introduce such new products to the Hong Kong ETF market.

Allowing Hong Kong to be the first market in Asia to allow the listing of spot virtual asset ETFs will help strengthen Hong Kong's position as a leading digital asset hub in the region and support Hong Kong's continued development as Asia's preferred ETF market, Mr Lo said.

Huajin Securities believes that for investors, the investment form of ETF provides a more liquid market, which is more convenient than cryptocurrency exchanges, and the more standardized pricing mechanism of ETFs also avoids the problem of price fluctuations. At the same time, virtual asset spot ETFs not only reduce the investment threshold and transaction friction, broaden the participation base of the capital market, but also provide financial institutions with a way to enter the field of digital assets.

However, it is worth noting that as a speculative and volatile asset, virtual assets are still recognized by no national or regional government as a currency or commodity, and how to carry out effective risk management and investor protection has also become the focus of regulatory attention.

Editor: Captain

Review: Xu Wen