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2 Bazookas; No Price War; 1 Big News Item; 3 New Types of ETF in China
Jackie Choy, CFA 2014-01-02

In 2013, we saw broad-based developments across different countries in relation to the Asian ETF market. Here, we look to the past year to prepare for the year to come.

2:  Two “Bazookas” - Japan and the US apply massive amounts of monetary stimulus while Emerging Markets raised rates
In January 2013, Japan launched an open-ended asset purchase plan, representing one of the “three arrows” underpinning “Abenomics”. With the arrows out of the quiver, Japan’s stock market was up around 50% for the year, while the Japanese Yen depreciated around 20% against the US dollar.

The US Fed’s asset purchasing programme which entailed buying US$85 billion of Treasury and mortgage-backed bonds per month was in-place throughout 2013. Persistent worries that the Fed would taper its asset purchases dominated headlines and moved the markets during the year. On 18 December 2013, the Fed announced that it would begin tapering in January 2014, reducing its monthly asset purchases by US$10 billion. Also, the Fed “reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time”. Now the markets will likely become more concerned with the pace of tapering and the timing and magnitude of interest rate increases.

While central bankers in the developed markets continued to fire their “bazookas” during the year, some of their counterparts in emerging markets such as India, Indonesia and Brazil, started raising their benchmark interest rates in an effort to battle inflation.

0: No Price War, After All
Earlier in 2013, it looked as though a price war that had begun in the US and crossed the Atlantic into Europe was spreading into the Asian ETF market. Indeed, in the middle of the year we saw a quiet “mini” price war developed amongst the RQFII ETFs listed in Hong Kong, as the fees levied by newly launched funds established a declining trajectory. However, the trend did not last long and the latest products that have come into the market have fees that are at the high end of the range.

Fees are not the sole consideration in selecting ETFs. That said fees--and management fees in particular--are one of the key elements that an ETF provider can control when it comes to the factors that contribute to the total cost of owning an ETF.

1: One Big News Item in the RQFII Space
In March 2013, the China Securities Regulation Commission (CSRC) announced the expansion of the RQFII programme to allow Hong Kong subsidiaries of mainland commercial banks and insurance companies, and other Hong Kong incorporated financial institutions with their operations based in Hong Kong eligible to become an RQFII. In addition, in October, London and Singapore were granted Rmb 80 billion and Rmb 50 billion RQFII quota respectively. The expansion of the RQFII programme receives our vote for news item of the year in the local ETF market.

With this expansion of the RQFII programme, Hang Seng Investment Management, part of the Hang Seng Bank, became the first non-Chinese ETF provider to launch an RQFII ETF in Hong Kong. In addition, Deutsche Asset & Wealth Management and Harvest Global Investments have teamed up to launch an RQFII ETF in the US,namely the db X-trackers Harvest CSI 300 China A-Shares Fund (ASHR) and, according to the AsianInvestor, they are preparing to launch an RQFII ETF in London in January 2014.

We expect to see RQFII ETFs launched in Taiwan and Singapore in the future. According to the Hong Kong Economic Times, the Taiwan Stock Exchange is launching an RQFII ETF platform in mid-2014, with dual currency counter--similar to those in Hong Kong.                                                                                                      


3: Three New Types of ETFs in China
It has been a fast growing year in the ETF market in China with over 30 ETFs listed on the exchanges during the year, putting total number of ETFs in the country to 78. In addition to the increase in the number of new listings, there were three new types of ETFs introduced to the market:

ETFs Tracking Foreign markets– The first ETF tracking a foreign equity index (excluding those tracking Hong Kong indices) was launched during the year. The fund Quotai NASDAQ 100 ETF tracks the NASDAQ 100 Index. There are a number of additional ETFs that will offer exposure to foreign securities in the pipeline, including funds which will track the EURO STOXX 50 Index, the STOXX Europe 50 Index and the S&P 500 Index.

Gold ETFs – Gold ETFs were introduced in China, as three gold ETFs were listed during the year. These ETFs track the Au99.99 Spot Gold Contract prices on the Shanghai Gold Exchange.

Bond ETFs – Bond ETFs were also introduced in China, as three bond ETFs were listed during the year, tracking treasury bonds/notes and corporate bonds in China.

The expansion of the menu of asset class exposures in the Chinese ETF market is encouraging. Different types of asset class and country exposures will ultimately offer investors different instruments to further increase portfolio diversification and efficiency. ETFs have proven to be one of the cheapest tools to gain access to the different exposures for investors.

ETF Listings in China in 2013

Source: Morningstar Research 

…And Other Developments Worth a Mention

Will MSCI Include A-Shares in Emerging Market Indices? – In June, MSCI announced it had initiated a review of China A-Shares for potential inclusion in the MSCI Emerging Markets Index. MSCI cited several hurdles that are impeding inclusion, including “(1) capital mobility, (2) the lack of alignment of the size of individual QFII quota and the size and investment process of investors and (3) the lack of clarity on taxation rules”.

Synthetic ETFs launched in Korea –Synthetic ETFs were introduced in Korea during the year. In 2013, five synthetic ETFs were listed on the Korea Exchange.

New ETF Markets Emerge- The first ETF came to the Philippines in December, making it the latest market in the region to offer locally-domiciled ETFs for domestic investors. Meanwhile,there is discussion that Vietnam and Pakistan are planning to launch ETFs in their local markets.

Thank you for your support in 2013 and we look forward to another exciting year inthe Asian ETF market in 2014.


Jackie Choy, CFA, is an ETF Strategist with Morningstar