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20 Facts and Thoughts to Commemorate 20 Years of ETFs in HK (Part 1)

A short time for Hong Kong; one giant leap for the HK ETF market.

Jackie Choy, CFA 21/11/19

The Hong Kong ETF market’s journey began with the launch of Tracker Fund of Hong Kong (02800), the first ETF on the Hong Kong Exchange (HKEx) on 12 November 1999. It was created as a means of liquidating positions in Hong Kong stocks that the Hong Kong government acquired as it attempted to backstop the local stock market during the Asian Financial Crisis in August 1998.

Tracker Fund of Hong Kong

1.    First ETF in Asia ex-Japan; Largest-Ever IPO

The Tracker Fund of Hong Kong was launched on 12 November 1999. It was the first ETF listed in the Asia ex-Japan region. Japan launched its first ETF in 1995. As an interesting aside, the IPO of the Tracker Fund of Hong Kong was the largest-ever IPO in Asia ex-Japan at that time, at around US$4.3 billion. – This was how the Hong Kong ETF market began.

2.    Size Matters – Ongoing charge at 0.09%

Exhibit 1 shows the management fee and trustee fee structure of the Tracker Fund. With a declining fee structure, the larger the fund’s assets under management, the lower the fee. At present, the ETF levies an ongoing charge of 0.09%. The fund had HK$33.3 billion in assets when it was first issued 20 years ago. It has since grown to HK$83.3 billion as of end-October 2019. - In general, size matters for ETFs as economies of scale can result in lower fees.

3.    Portfolio – The Mix

The Tracker Fund tracks the Hang Seng Index. The composition of the Hong Kong equity market has changed a lot in 20 years. Notably, the number of listings of Chinese companies has increased over the years. Before the addition of China H-Shares as eligible stocks in the Hang Seng Index from September 2006, Chinese companies accounted for around a quarter of the index’s value. As of the end of October 2019, Chinese companies accounted for 53.5% of the index’s value, including 26.1% in H-Shares. – The Hang Seng Index has served as a barometer of the Hong Kong stock market since November 1969, started with 33 constituents.

4.    Portfolio – The Caps

The Hang Seng Index has undergone a variety of changes over the past two decades.  The cap on individual constituent’s weightings was lowered over the years. Today, it stands at 10%. The largest component in the index at the time the Tracker Fund’s offering prospectus was released was HSBC Holdings, which accounted for 27.7% of the index’s value as of 20 October 1999. Also, the number of constituents has been increased gradually over the years. The actual number of constituents has been fixed at 50 since December 2012. The ETF held 33 stocks at its inception. – Caps on the weightings of individual constituents and an expansion of the number of index constituents has helped reduce concentration risk.

5.    MPFs Own 16% of the Tracker Fund

According to Ming Pao, MPFs (Mandatory Provident Funds) accounted for 16% of the Tracker Fund’s assets as of June 2019. – In our view, the use of low-cost ETFs can help reduce total cost of investing in MPFs.

6.    Total return 301% from IPO

If an investor held the Tracker Fund of Hong Kong from its first listing at IPO price (HK$12.88) through 12 November 2019, they would have reaped a total return of 301% (with dividends reinvested). This amounts to an annualized rate of return of 7.2%. - This compares favorably to 220%, or 6.0% compounded (before tax) on the SPDR S&P 500 ETF Trust (SPY; listed in the U.S.), which tracks the S&P 500 Index, during the same period.

7.    The Ecosystem

There are numerous derivatives (futures, options, warrants, callable bull/bear contracts (CBBCs)) that use the Tracker Fund as an underlying. For creations and redemptions of the units of the Tracker Fund, it has 18 participating dealers, as of 13 November. - With its size, liquidity and exposure, the Tracker Fund of Hong Kong plays a central role in the ecosystem of the Hong Kong stock market.

Hong Kong ETF Market

8.    Assets Under Management in the HK ETF Market

US$37.1 billion as of 31 October 2019, excluding cross-listed ETFs. – There are some cross-listed ETFs listed on the HKEx that are very large, e.g. the SPDR Gold Trust (02840) has a total fund size of US$44.5 billion as of 31 October 2019.

9.    HK vs The World

According to the data from Morningstar Direct, global ETF assets under management totaled around US$5.9 trillion as of 31 October 2019. - This puts Hong Kong’s global ETF market share at 0.6%. At US$4.2 trillion, the U.S. has the lion’s share (72%) of global ETF assets.

10. Number of ETFs in Hong Kong

As of 31 October 2019, there are 211 listed ETFs and leveraged/inverse products (134 products, 77 multiple counters, including 24 L&I Products). – There are 2000+ ETFs available in the U.S.

(To be continued...)

 

About Author Jackie Choy, CFA

Jackie Choy, CFA  

Jackie Choy, CFA is the Director of ETF Research for Morningstar Investment Management Asia