Volume 2 Issue 3
july 2014
The Electronic Trading Resource for Asia
WHY FUND INVESTORS
JAPAN KOREA FOR ETF CROWN WWW.ASIAETRADING.COM
ISSUERS OVERCOMING REDEMPTION
TOP 50 ASIA ETFs EXCHANGE TRADED FUNDS OR FUTURES?
GETTING FAST EXPOSURE OVERSEAS July 2014
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THE ETF ISSUE Exchange traded funds were traded in Asia before they were available in Europe, yet make up less than 10% of global AUM. There are a number of factors for this â&#x20AC;&#x201C; cultural, educational, regulatory â&#x20AC;&#x201C; that have hobbled this product for some time; but that is changing. ETFs are an ideal access product and as pensions and professional wealth management continue to develop exposure to them will increase. Passporting, as is available in Europe, is slowly coming to Asia and the RQFII rules have been a boon opening up the vast Chinese savings everyone is eager to tap into. There is a lot of upside for the ETF industry in Asia and we thought we would dedicate a whole issue to this valuable but poorly understood product. Enjoy your summer and the ETF issue.
Stephen J. Edge Editor Scan the Quick Response Code with your iPhone or Android Phone to take you to the Subscription page
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CONTENTS
Volume 2 Issue 3
july 2014
The Electronic Trading Resource for Asia
WHY FUND INVESTORS
JAPAN KOREA FOR ETF CROWN
ISSUERS OVERCOMING REDEMPTION
PAGE 10
PAGE 14
PAGE 18
TOP 50 ASIA ETFs EXCHANGE TRADED FUNDS OR FUTURES?
GETTING FAST EXPOSURE OVERSEAS
JULY 2014 VOLUME 2 ISSUE 3
06 08 10 14
IN THE ZONE Our round-up of industry news and developments across Asia.
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ETF - IN THE ZONE
JAPAN VS KOREA INVESTORS BUY LOCAL Japan vs Korea ETFs - In Asia, Japan and Korea see the largest values traded in ETFs, helped by leveraged funds, however the markets need different dynamics to achieve growth.
Why fund investors buy local – The providers of ETF are treading cautiously in Asia as the nascent appetite of local investors grows larger.
PAGE 24
PAGE 26
PAGE 28
Our round-up across Asia’s ETF industry this past year.
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CONTENTS
18 22 24
DERIVATIVES ASIA FUTURES BUY SIDE 20 -VOLATILITY Asia’s tentative steps into the Contrasted: ETFs and Futures TRADING A look at volatility around Asia. ETF market - ETF providers - Futures and exchangeRECAP face significant hurdles traded funds provide parallels in exposure, for which Asian markets pose unique challenges.
See the latest derivatives volume rankings at Asia’s exchanges.
persuading Asian investors of their diversification and costeffective merits.
28 33 36 48
PAGE 34
PAGE 48
OPINION POLL EQUITIES What is needed to help ETF products grow in Asia?
WWW.ASIAETRADING.COM
Asia ETF providers and AUM snapshot.
WHO’S WHO
Asia Etrader spoke with Curtis Tai, at China Asset Management (HK) Ltd.
POST TRADE
Behind the scene of ETF creation - Managing ETFs in Asia can be challenging as a result of inefficient technology and a fragmented market.
26 -REGULATION
Asia ETF trading to get a boost through regulatory efforts - ETF trading in Asia is set to grow as regulators focus on structural reform and on providing access.
34 -O & A
Understanding ETF tracking errors.
38 - FRAGMENTATION
Read the latest on alternative venue competition in Asia.
44 - ASIA EQUITY TRADING RECAP
The latest rankings of turnover, average trade sizes, spread and market impact costs on Asia’s exchanges.
47 - TOP 50 ETFs Top 50 ETFs in Asia by AUM
50 - BACK PAGES
Dates – Exchange holidays and important industry events Directory – A listing of Asia’s electronic trading industry participants
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IN THE ZONE
Australia
The Australian Securities Exchange (ASX) launched its new managed funds settlement service mFund. The Australia Securities and Investment Commission (ASIC) released a review on ‘dark trading,’ which found concerning trends in dark liquidity have discontinued. The US Commodity Futures Trading Commission (CFTC) entered into a MoU with the Reserve Bank of Australia and ASIC regarding clearing organisations that operate on a cross-border basis in the United States and Australia. The Asia Pacific Stock Exchange (APX) and NASDAQ OMX have signed an agreement that will see NASDAQ OMX technology power APX’s APeX trading platform. Chi-X Australia has confirmed a fee of 0.15bps per side will apply to all Markets On Close (MOC) trades executed from 1 July 2014.
China
Nomura Holdings signed a joint-venture agreement with
three Shanghai-based finance firms in the Shanghai Free Trade Zone. Shenzhen Stock Exchange (SZSE) officially implemented pricing block trading after trading hours. The SZSE issued the ChiNext 50 index of 50 stocks with the best liquidity during the observing period. Dalian Commodity Exchange (DCE) and Bank of Communications inked a strategic cooperation framework agreement in Dalian.DCE carried out the first full-market networking test for night trading from the evening of 7 June to the afternoon of 8 June. London Stock Exchange Group signed a MoU with Bank of China that aims to promote the development of the UK’s offshore RMB market. Luxembourg Stock Exchange signed a MoU with Bank of China to bolster Luxembourg as an offshore RMB centre and market for international listings.
Dubai
DGCX SENSEX futures rose 41% in April. DGCX volumes surged 24% in May on the back of strong growth in the currency segment. The DGCX appointed Sanjeev Vohra as head of Soft Commodities. Japanese fund manager Nomura Asset Management opened its first Middle East office in Dubai.
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Hong Kong
The Securities and Futures Commission (SFC) fined Kaiser Securities and Kaiser Futures a total of $1.7 million for conducting unauthorised financial activities in breach of Macanese law. In May, the SFC banned Christopher Ma Chun Leung and Wong Man Chung, both former Morgan Stanley employees, from re-entering the industry for 10 years and two years, respectively. The SFC found that Ma, the supervisor of a program trading desk and Wong, a trader under Ma, had acted against the interests of clients and taken advantage of institutional clients’ executions of orders in stocks traded on the Hong Kong Stock Exchange. The SFC also banned Helen Chow Hoi Ching, a former Royal Bank of Scotland employee, and Choy Cheuk Tung, a former Standard Chartered employee, from re-entering the industry for life. Chow was sentenced to imprisonment of four years by the District Court following conviction on one
count of fraud in September 2013. Choy was sentenced to imprisonment of 18 months by the District Court following convictions of three counts of theft and three counts of dealing with property known or reasonably believed to represent proceeds of an indictable offence in December 2013. Separately, the SFC reprimanded Citigroup for failing to ensure that certain securities orders executed through its algorithmic trading system between April 2009 and May 2010 would not cause undue price impact to the market. The CFTC’S Division of Clearing and Risk announced it will not take enforcement action against OTC Clearing Hong Kong Limited (OTC Clear) for failing to register as a derivatives clearing organisation. As a result, OTC Clear is now able to offer its clearing services to eligible US persons or their affiliates.
India
Citi’s Securities Services became the first Designated Depository Participant (DDP) in India to register a Foreign Portfolio Investor (FPI). The FPI regime significantly eases access to the Indian markets and allows a wide variety of previously ineligible investors to access in India. WWW.ASIAETRADING.COM
IN THE ZONE
Japan
The Tokyo Stock Exchange(TSE) published its analysis of highfrequency trading at the TSE as of March 2014, finding that HFT provides liquidity to the market. STOXX Limited licensed its EURO STOXX 50 Hedged JPY Index to Nomura Asset Management to be used in passive funds that will be used by Japanese institutional investors. Nomura will combine its Japan and Asia operations, effective from 1 July, with Juntaro Kimura overseeing the new organisation as senior managing director and head of Wealth Management. Japan’s Financial Services Authority intends to strengthen cooperation with the State Bank of Vietnam and the Financial Services Authority of Indonesia. The Tokyo Commodity Exchange will update exchange trading hours from 22 July. TSE will launch a renewed version of the arrowhead cash market trading system on 24 September. The JPX-Nikkei Index 400 futures market will be
New Zealand’s equity derivatives market. It will trade off the NZX20 index, a capital index with a base of 3000, and is highly correlated with the NZX50 benchmark index.
Singapore
Derivatives market operator CME Group approved a unit of United Overseas Bank, UOBBF Clearing, as a new Clearing Member, effective 30 April. UOB also became the first Asian-based Eurex Clearing member, which allows UOB to clear business of Eurex trading members and provide respective services to them. Effective 20 May, ASX customers in the Australian Liquidity Centre (ALC) or on ASX can connect to SGX brokers at the SGX Co-Location Data Centre and receive market data from SGX.SGX welcomed Marigold International Securities to its derivatives market as a trading member. SGX is building up its bulk commodity product offerings with nine more
OUR 60 DAY SUMMARY OF ASIA’S ELECTRONIC TRADING INDUSTRY.
launched on 25 November. NTT Communications Corporation will build a data centre in Osaka, expected to launch in Q1 2016.
Korea
Effective from 2 June, the trading unit on the Korea Exchange (KRX) is lowered from 10 shares to 1 share, for all stocks listed on the KOSPI market. British telecommunications firm BT and Korean financial IT provider KOSCOM will launch a ‘liquidity hub’ in Hong Kong in July to help the KRX grow its business globally.
Malaysia
Bursa Malaysia (BMB) launched a new futures contract on 16 June to strengthen BMB as the global marketplace for palm oil derivatives. The Malaysia Securities Commission and Hong Kong SFC held a seminar in Hong Kong to boost cross-border cooperation in Islamic finance, notably fund management.
New Zealand
The NZX launched an Index Futures on 16 June to boost WWW.ASIAETRADING.COM
derivative contracts in June and July, subject to regulatory approval. Scott Keller will join asset manager T. Rowe Price from July as the new head of its Asia Pacific distribution business, based in Singapore. Singapore and the US expect to sign an Intergovernmental Agreement (IGA) that will facilitate compliance with the US Foreign Account Tax Compliance Act (FATCA) by Singapore-based financial institutions in the second half of 2014.
Taiwan
The Taiwan Stock Exchange (TWSE) and GreTai Securities Market (GTSM) jointly launched the “Formosa Stock Index” in May. As Taiwan’s first cross-market index, it measures the aggregate performance of the Taiwan securities market.
Thailand
The Thailand Futures Exchange PCL (TFEX), under the Stock Exchange of Thailand (SET) group, announced the successful launch of its new derivatives trading and clearing systems on 6 May and welcomed Apple Wealth Securities to operate as a derivatives brokerage from the same day. July 2014
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IN THE ZONE
GREATER CHINA
Vanguard, the world’s largest mutual fund company, expanded its product offering with three new Hong Kong-domiciled exchange traded funds (ETFs), which began trading on the Hong Kong Stock Exchange (HKEX) on 13 June. As the first physicalbacked ETFs offering exposure to the developed European markets and Japan, they break new ground in the Hong Kong market. Four new C-Share ETFs began trading on the HKEX on 12 May: the CSI Consumer Staples Index ETF in RMB and HKD as well the CSI Healthcare Index ETF in both the Chinese and Hong Kong currencies. Investors for the first time can participate directly in the performance of the FTSE China A50 Index with the CSOP Source FTSE China A50 UCITS ETF. The index includes the 50 largest listed Chinese A-share companies on the Shanghai and Shenzhen stock exchanges in terms of market capitalization.
underlie an ETF in Korea.
2013 Greater China
China’s first cross-border ETF, based on the NASDAQ-100 Index, began trading on the Shanghai Stock Exchange on 15 May. The Guotai NASDAQ-100 ETF sponsored by Guotai Asset Management was created so that investors in China could easily invest in the largest and most liquid companies traded on the NASDAQ. It is the first China ETF to provide access to the U.S. market. Harvest Global Investments Limited (“HGI”) launched the Harvest MSCI China A 50 Index ETF, providing investors with access to the largest 50 constituents of the MSCI China A Index based on domestic free float-adjusted market capitalisation. The fund listed with nearly RMB 1.60 billion in day-one assets under management when trading began on 6 June on the Hong Kong
In The Zone - ETF Two new equity index funds from the ETF Securities product family are now tradable in Deutsche Börse’s XTF segment, the ETFS-E Fund MSCI China A GO UCITS ETF and the ETFS US Energy Infrastructure MLP GO UCITS ETF. This enables European investors to participate for the first time in the performance of the MSCI China A Index, which comprises a diverse selection of Chinese A-shares listed on the Shanghai and Shenzhen stock exchanges.
Japan
Trading value in the ETF/ETN market in May was approximately JPY 1.7555 trillion, with the daily average reaching about JPY 87.8 billion.
Korea
STOXX Limited, the index concept provider, licensed its EURO STOXX 50 Index to Mirae Asset Global Investments, a leading Korean asset management specialist, to serve as the basis for an ETF that listed on the Korea Exchange (KRX) 30 April. It is the first time that the EURO STOXX 50 Index has been licensed to
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Stock Exchange (HKEX). Citi Hong Kong has been appointed by China Asset Management (Hong Kong) Limited (CAMHK) to provide global custody, trustee and fund administration services for their newly launched CES China A80 Index ETF. As the Renminbi Qualified Foreign Institutional Investors (RQFII) custodian, Citi China is responsible for ensuring the safe custody of CAMHK’s assets under management within China.
Singapore
Singapore Exchange (SGX) proposed to publish closing prices for ETFs and implement a methodology to determine their closing prices that will more accurately reflect prevailing market conditions. This will allow investors to have an up-todate closing price during portfolio valuation and when they make investment decisions. Implementation of the proposal is expected in 2014. WWW.ASIAETRADING.COM
COVER STORY
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COVER STORY
In Asia, Japan and Korea see the largest values traded in exchange-traded funds, helped by leveraged funds, however the markets need different dynamics to achieve growth. Dan Barnes reports.
T
he Japan Exchange Group (JPX) and Korea Exchange (KRX) are in a two-horse race to be exchange-traded fund (ETF) king in Asia, by value traded. Korea saw KRW14.5 trillion (US$13.6 billion) of ETFs traded in March 2014, while Tokyo saw ¥2.6 trillion (US$25 billion) of ETFs traded in the same month. Volume on the KRX has been at that level for some time, but Japan’s boom really came about with the rise of Abenomics in 2013, with the government buying ETFs as part of its quantitative easing programme. Value traded on the Tokyo Stock Exchange (TSE) increasing from US$3 billion in January 2013 to US$7 billion in June to US$15 billion in July, when the ETF market of the Osaka Securities Exchange was added to the TSE, and reached an all-time high of US$30 billion in December 2013 (see box 1). KRX, by contrast, has stayed within a US$1.6 billion range of US$14.7 billion in monthly value traded for the last year. It has also displayed the uniquely Korean interest in complex products for retail investors, a characteristic that has made its derivatives market. “Korean markets are changing from retail driven, with leveraged and inverse ETFs, to institutional-driven,” explains Yoon Joo Young, the head of the ETF Investment team at Mirae Asset Management.
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COVER STORY
COMPLEX PRODUCTS DRAW KOREAN INVESTORS
The Korean market uses registered local securities companies as formal liquidity providers, while high-frequency trading firms from overseas are actively involved with providing liquidity and intra-day trading. KRX currently has an incentive program for ETF liquidity providers to support low volume ETFs, which involves a quarterly assessment of each liquidity provider’s contribution. A certain amount of the trading fee is then rebated to the liquidity providers. By assets under management (AUM), the top three ETFs in the market - Kodex 200, Tiger 200 and Kodex Leverage - are all based on the underlying Korea Composite Stock Price Index (KOSPI). “The Korean ETF market is 12-years old and generally speaking the maturity level – based on the diversity of usage – it is not so advanced, but ETF trading explains about 20% of total trading volume for equity products, a number similar to top-tiered market like the US,” says Young. “Around 60% of ETF trading is attributed to leverage/inverse ETFs and the Korean market is certainly more leverage/inverse ETF biased.” To support the use of ETFs, KRX says it has been working closely with asset managers to promote the market to a various type of investors with periodical seminars held to help educate institutional investors such as pension funds and private bankers. It has also been visiting companies and universities to educate individual investors on a request basis. It distributes ETF monthly reports which contains current market issues and status. Investors can find information on ETFs such as product comparison, yields, market statistics and prospectuses on the KRX website, and it also publishes educational materials for first time investors and those with more experience. Mee-young Jeong who is a senior vice president for Securitised Product Marketing team at KRX says that over the next 24 months the exchange expects the AUM of the ETF market to increase to KRW25 trillion (US$25 billion) from KRW17.6 trillion in May 2014. To achieve this target, KRX is scheduled to introduce a fairly diverse range of ETF products and also to try and ease the regulation that limits off-shore ETFs to be listed on KRX. “To diversify its ETF product line-up, KRX seeks to list foreign index ETFs and leveraged and inverse ETFs based on foreign indices,” Jeong says. “In 2014, Eurostoxx50 ETF, MSCI Germany ETF, and two TOPIX leveraged ETFs (2x leverage) have already listed on KRX. Also, India ETF, CSI300 Leveraged ETF (2x leverage), HSCEI leveraged ETF (2x leverage), and TOPIX inverse ETF (-1x leverage) are expected to be listed in this year. Furthermore, KRX is planning to continuously introduce smart beta ETFs and fixed-income ETFs to absorb investors’ demands in a low interest rate environment. Next, in order to facilitate cross-listing for offshore ETFs, KRX is trying to work with the financial authorities to simplify the fund register process for off-shore ETFs.”
WWW.ASIAETRADING.COM
RISE OF LEVERAGE IN JAPAN The sudden growth in the Japanese ETF values reflected a change that was in two characteristics of the market, its investor base and the types of ETFs being used. Young says, “Japan’s market is changing from being governmentdriven from Bank of Japan’s ETF investing to retail driven, with the Nippon Individual Savings Account (NISA) booming and leveraged ETFs booming.” Ryota Kimura, senior vice president of Product Development New Listings Department at the TSE says, “In terms of trading value, the main players in our ETP market are retail and foreign investors - that seem to be market makers. Foreign investors account for almost 50% and retail investors do for about 40% of the whole trading value.” Since 2008, the TSE took some deliberate steps in order to try and develop the ETFs and exchange-traded product (ETP) market. It set a target to list 100 ETFs by March 2011 and which it hit after revising its regulations to allow the listing of new types of ETFs with a variety of underlying assets, such as gold, fixed-income, and physically-backed precious metals ETFs. Exchange-traded notes, debt instruments that track an index but can be affected by the underlying firms’ credit rating, were launched in August 2011. “Twenty-three ETNs have been listed since, with underlying assets varying from domestic equity to commodity, volatility and so on,” says Kimura. “As a whole, we have 179 ETNs listed on the TSE market as of 10 June 2014.” Listing rules for new types of ETPs such as ‘enhanced’ type ETPs and leveraged and inverse type ETPs were amended in 2011. “The amendment was one of the most important factors that are attributed to the rapid growth of our ETP market,” Kimura says. “As of today, we have 19 leveraged and inverse types of ETPs whose exposures are not only domestic equity but also foreign equity and commodity such as gold, precious metals, oil, and so forth. We also have three enhanced-type ETFs which realise certain investment strategies. Now investors can enjoy covered call strategy and risk control strategy by using these ETFs.”
Atsuo Urakabe Nomura Research Institute -------------------------------------------“...given the growing popularity of leveraged/inverse ETFs in Japan, [market impact of rebalancing] could be a risk.”
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COVER STORY
TSE ETF Trading Value and Assets (JPY trillion) 10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00
Domestic ETF Trading Value Domestic ETF Total Assets
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
TSE and KRX ETF Trading Velocity 1.2 1 0.8 0.6
KRX
0.4
TSE
0.2 0 Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
KRX ETF Trading Value and Assets (KRW trillion) 20.00 19.00 Source:Exchange website
18.00 Trading Value (KRW)
17.00 16.00
Total Assets
15.00 14.00 13.00 12.00 Mar-13
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Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14 WWW.ASIAETRADING.COM
COVER STORY
FUTURE GROWTH
RISKY BUSINESS
Concern around leverage predates the financial crisis but has been more of a focus since. The use of leveraged ETFs by retail and institutional investors has therefore been of some concern to market observers. On 28 May 2014, Larry Fink, chief executive of global asset manager BlackRock spoke at the Deutsche Bank Global Financial Services Conference in New York about the risks of leveraged ETFs, saying, “We’d never do one. They have a structural problem that could blow up the whole industry one day.” Leveraged ETFs provide a return or loss that is a multiple of the underlying index, while inverse ETFs provide a return or loss that is an inversion of the index. Leveraged ETFs create a loss even if the index does not move. According to Nomura Research Institute (NRI), the geometric average return is based on the arithmetical return minus half of the returns’ variance, which for a leverage of 2x would deliver depreciation of net asset value at the rate of variance. In addition these funds charge fees of 0.8% per annum which is far higher than normal ETF fees. “[They have gained popularity because they enable investors with strong confidence in their market views to take short positions or index positions without borrowing shares or trading futures,” noted senior researcher Atsuo Urakabe in an NRI research noted dated 5 June 2014. “However these ETFs are geared toward expression of short-term trading ideas. They are not necessarily suited for long-term, buy-and-hold investing.” Speaking to Asia Etrader, Urakabe says, “I think although trading volumes have spiked since last year, Japan’s leveraged ETFs’ current assets under management are so small relative to overall market liquidity that the market impact of rebalancing, at least in the current situation, are not evident. But given the growing popularity of leveraged/inverse ETFs in Japan, it could be a risk.”
Ryota Kimura SVP, Tokyo Stock Exchange -------------------------------------------“Foreign investors account for almost 50% and retail investors do for about 40% of the whole trading value.”
WWW.ASIAETRADING.COM
The reliance by Japanese markets of growth from leveraged and inverse ETFs has a natural cap Urakabe argues. He notes that their popularity was attributable to traders with short-term goals and a high-turnover, but that there were limits to such growth and that the number of assets had only grown by 56% which did not reflect the enormous change in the value of assets held. The NISA has provided an opportunity for retail investors to increase their exposure to ETFs, however Urakabe has noted reports that many of the ETFs held in these accounts are leveraged or inverse. The TSE says that it hopes the ETP market will grow further by reflecting the needs from investors, ETF providers and other market participants. Kimura says, “Although we believe that our ETP market is quite open to any market participants, some foreign market participants mention that relevant information in English is a bit limited compared with other international markets. So we are working with ETP providers to provide more useful information in English in a timely manner.” An examples of an initiative it has launched is the ‘Foreign ETF Support Member’ system designed to provide liquidity in foreign ETPs. Under this system, trading participants appointed as a ‘Foreign ETF Support Member’ can attain payback of trading fees on designated foreign ETPs in return for providing liquidity on them. “In addition, we have launched joint-events with ETF providers or distributers to promote the ETP market. For example, we hold seminars with them at many regions in Japan. Furthermore, we have done promotion activities in foreign cities such as Shanghai, Beijing, Hong Kong, Singapore and London,” Kimura says. Young notes that Korean ETF markets are home-biased, helped by the lack of capital gains tax on local equities. However, he sees opportunities for growth with overseas products but only if reforms are made around tax. The difference of tax treatment between on-shore foreign ETFs - ETFs which track foreign indices and are listed on KRX - and off-shore foreign ETFs - which track foreign indices and listed on foreign stock exchanges - is a deterrent for ETF trading in Korea. Jeong says, “Whereas the gain from selling on-shore foreign ETFs is taxed as ordinary income, maximum of 41.8%, off-shore foreign ETFs is taxed as capital gain 22%.” Young says, “More and more Korean investors are looking for higher return and diversification vehicles naturally because of low return, low interest, low growth rate of the economy and the aging population. Even though there is a continuous new ETF listing of overseas underlying asset classes, there are so many obstacles such as unfair tax treatments, market close pricing and low trading volumes that prevent ETFs from being attractive. If there were powerful support from regulators and exchanges, there could be an emergence of successful overseas-linked ETFs.”
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COVER STORY 2
WHY FUND INVESTORS
The providers of exchange-traded funds are treading cautiously in Asia as the nascent appetite of local investors grows larger. Dan Barnes reports.
A
sian markets are well-represented within the indices of exchange-traded funds (ETFs), but the instruments are mainly listed outside of the region. Global providers are hesitant when listing products in Asia, as the unified market rules seen in Europe and the US are missing, which create national siloes for products. However, a home bias amongst investors creates a clear need to service provision at a local level, and the maturing of the market is promising good returns for firms that develop liquid products. In Hong Kong, Vanguard, a US asset manager with a strong passive investment strategy, has released three new ETFs tracking the FTSE Asia ex-Japan High Dividend Yield Index, FTSE
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Developed Europe Index and the FTSE Japan Index which allow local investors to reach Europe and Japan. “As with Japan and Korea, the majority of investing in Hong Kong is locally focussed but we are in the process of launching three new products to allow local investors to get exposure to Europe, Japan and Asia,” says Douglas Yones, Head of ETFs, Asia, Vanguard Investments Hong Kong. “Most players are trying build me-too products, and chasing what is ‘hot’ where we are trying to help them build an investment portfolio. We look at it from the allocation perspective rather than what is hot.” Ray Chan, head of ETF Business Development for Asia ex-Japan, WWW.ASIAETRADING.COM
COVER STORY 2 at State Street Global Investors says, “What we notice from working with many large institutional investors in the region is that there’s a growing need for overseas access and ETFs provide a liquid and tradable means of achieving this. The tradability aspect of ETFs also comes in handy for fixed income investors as ETFs provide an additional layer of liquidity. The combination of the need for diversification and liquidity are important catalysts for the growth of the ETF industry.” However there is a still greater interest in accessing the Asian markets from outside. Global fund manager and ETF provider BlackRock estimates that from Asian clients approximately US$10 billion of its assets under management is based in AsiaPacific ex-Japan. Its primary growth is from its flagship FTSE 850 product, a China-access ETF for which it sees about US$200-300 million traded a day and holds around US$7 billion AUM. A spokesperson for the firm confirmed that about US$1 billion of the US$3 billion it has seen in new business so far this year was generated by that fund suggesting that there is a lot of interest in accessing China.
The Maturity Curve
To deliver effective assistance in the region to local investors, ETF providers have to follow their development closely. There are many local providers, particularly in markets like Japan where institutional investment has already taken off. Jackie Choy, ETF strategist at Morningstar says, “If you look at Japan, Korea and China, they are very locally dominated. China is one of the more controlled economies, and so it has to be the local providers that are providing these products at first, therefore it is hard for the offshore providers to come in and do business in the first place. Hong Kong is a bit different, there aren’t a lot of local providers, the firms are more like iShares, but nevertheless there are upcoming local providers with the Renminbi Qualified Foreign Institutional Investor (RQFII) and Qualified Foreign Institutional Investor (QFII) schemes that allow ETFs to invest into China.” Still, the global players are finding room for growth; BlackRock reported its Nikkei 225 fund hit US$1 billion AUM in the first week of June. Pickup has been from new clients and segments that are looking to access the Japanese market, including regional banks which have been creating strong inflows over the last 18 months. Being creative around new products has also helped.
“The tradability aspect of ETFs also comes in handy for fixed income investors as ETFs provide an additional layer of liquidity.” Ray Chan, State Street Global Investors
State Street’s Chan says, “We have partnered with one of the leading credit investors in launching the first actively managed senior loan ETF, an attractive asset class for managing interest rate risk for an uncertain rate environment. There is also growing interest in advanced beta strategies, also known as smart beta, and as such we have introduced some new ETFs that use non-traditional market cap weighting methodologies such as fundamental, volatility, momentum and so on.” Last year Blackrock launched a set of Japan depositary receipts (JDRs) on the Tokyo Stock Exchange (TSE) that are wrapped around US-listed iShare ETFs to provide international and global exposure to local self-directed traders and smaller regional banks in Japan which typically cannot invest as easily offshore as the big banks and funds. The firm reports seeing US$80 million WWW.ASIAETRADING.COM
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COVER STORY 2 of net new business flow into those products. However the firm’s spokesperson is prudent, noting, “We are launching a handful of products where it makes sense to in the local market.” Chan says that as the industry expands, various investors have demanded a greater variety of ETFs to meet the broader range of objectives and risk tolerances they each have. “However, along with this evolution comes the growing complexity of ETF analysis, as ETFs that appear to represent the same market segment can sometimes look markedly different beneath the veil in terms of index methodology and product construction,” he notes. “Ultimately, investors need to look beyond just the exposure of the underlying index when evaluating an ETF. Assessing critical factors such as tracking method, liquidity, index methodology and overall cost are important in order to best determine whether the ETF fits the desired risk/return profile and investment objective of the investor.” For example, he points to liquidity as a key feature of ETFs, especially for large institutional investors and notes that individual product liquidity is often judged solely by onexchange trading activity.
“There is a much higher risk appetite for stocks and so active funds still dominate a lot of flows, but there is a place for active and a place for passive portfolios...” Douglas Yones Head of ETFs, Asia, Vanguard Investments Hong Kong
“In practice, the unique structure of ETFs means that underlying liquidity for large transactions may be far greater than these measures suggests, which may be leading investors to rule out certain products due to an incomplete picture of their true liquidity,” he says. “At SPDR, we believe investor education is important in debunking some of these misconceptions and this is where we focus a lot on, and over the years we have seen improving understanding on ETFs and it is very encouraging.”
New Demographics
In Japan such education may be assisted through the admittedly long-term goal of building out the financial advisory industry, not unlike the fee based advisors seen in the US, which would help drive market development away from the purely institutional base. In Singapore and Hong Kong, where there is still very much an active investor and mutual fund market, firms are starting to see traction from ETFs via private banks whose ability to package products or use ETFs in their discretionary portfolios is similar to that of a fee-based advisor, the model that works best for ETFs; being paid in commission as a proportion of products sold does not typically incentivise advisors to look for low-cost methods of gaining exposure in a portfolio. However one private banker, who asked to speak anonymously admitted that the lack of a direct fee structure in the advisory capacity was still problematic and would be challenging to implement in the future. “In Asia the private banking discretionary side is a large consumer of ETFs; on the advisory side it is growing but all Asian-Pacific with the exception of Australia still work on a commission-based model, like in continental Europe,”he says. “There is not a fee-based distribution model like in the US, the UK or the Netherlands. That
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COVER STORY 2 makes it difficult for wealth managers to distribute ETFs because they don’t get any rebate. It is not diffused in the mentality in Asia to pay a fee to someone investing in ETFs and managing your money, as happens in the US.” Australia’s Superannuation retirement funds have seen significant growth as a result of a government drive to ensure that they are well funded, but that has set them in contrast to the relatively small local asset pool. The consequence has been for them to look overseas and ETF providers report that they are starting to see institutions managing money using ETFs for parts of their portfolio to gain quick exposure or where they may not have much expertise, for example for where they have an Asia-Pacific benchmark but no plans to build up the overseas team. Smaller markets like the Philippines often see local asset managers that are overweight in local exposure and have little expertise in investing overseas, making ETFs a quick and cheap way of getting that exposure. “If you are a local institutional investor, one of the things I would think about is whether I need a locally-listed ETF to do the job,” says Choy. “When I look at the list of ETFs available in the world that will do the work for me, and there is a US-listed that does the job and the fees are good then even if I am sitting in Japan then a US-listed ETF can look good, it depends on the different investors’ criteria and mandate as to what they can and want to choose from.”
Unpredictability
Investors must also consider the risks involved in ETFs investment. Japan and Korea are two markets that allow leveraged ETFs to be traded, for which both the losses for investors can out weight the original investment. In China, uncertainty over capital gains tax – the government has not said that it will or will not charge for it – has led to some confusion. Where last year the BlackRock’s iShares ETFs were outliers to the other ETFs by not charging to provision for the potential imposition of tax, in December 2013 they began to say that they would. Then in January, other QFII ETF providers who had previously provisioned for the tax, stopped. China AMC and CSOP Asset Management stopped providing for the tax for certain funds, noting that they were Hong Kong domiciled funds and with Hong Kong tax certificates they could can apply for a tax treaty with the Chinese government. “In my opinion there is still a risk that the Chinese government may or may not charge for the tax, and so whether or not to provide for the tax or not provide for the tax is an ETF provider decision,” says Choy. “Providing it is more prudent but hurts the NAV not providing gives a better match to NAV but with a potentially big downside risk. There are pros and cons and the fact that differences creates inconsistency in the industry, and we prefer to have consistency.”
“Hong Kong is a bit different, there aren’t a lot of local providers, but nevertheless there are upcoming local providers with the RQFII and QFII schemes that allow ETFs to invest into China.” Jackie Choy, ETF strategist, Morningstar
However the opportunity for passive funds to succeed in Asia as they have taken off in Europe and the US is based on fundamental advantages says Yones.“ There is a much higher risk appetite for stocks and so active funds still dominate a lot of flows, but there is a place for active and a place for passive portfolios,” he says. “We are engaging in a lot of education right now. There are places in a portfolio where your core beta exposures you really don’t get value in trying to find them with a manager because the costs of paying them outweigh the advantages.” WWW.ASIAETRADING.COM
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DERIVATIVES
“...we are observing market makers using futures to hedge positions and increase the broader liquidity pool in the Asia ETF space.”
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WARREN DEATS
Head of ETF and Asia portfolio trading, Bank of America Merrill Lynch.
CONTRASTED: Futures and exchange-traded funds provide parallels in exposure, for which Asian markets pose unique challenges. Dan Barnes reports. We see the relationship between futures and exchange traded funds (ETFs) as fairly symbiotic,” says Warren Deats, head of ETF and Asia portfolio trading at Bank of America Merrill Lynch. “From where we stand, futures and ETFs tend to help each other out and within this wider ecosystem, we are observing market makers using futures to hedge positions and increase the broader liquidity pool in the Asia ETF space.” There are arbitrageurs in the futures and ETF market keen to move on any exploitable discrepancy, says Deats, who notes market maker firms are very active in that space. A good chunk of assets under management in Asia are held by big index funds, indexes which have futures attached to them. As a result almost all of the major flows in ETFs in Asia have comparable flows in futures. The relationship between ETFs and futures can be exploited for its points of complement or contrast depending upon the trader. ETFs can trade with wider spreads and with less liquidity than their equivalents in the futures market, notes Jon Evans, CEO of Abiding Capital, however ETFs can be better suited to investment for a longer-term position since they do not have to be rolled and do not require funding for margins.
“Futures provide very good hedging for users of the ETF and by using futures together with the ETF you get a more diversified strategy.” -----------------------------------------
JACK WANG
Head of sales, CSOP Asset Management
“A critical point for the investor is the tracking error; for index futures this is usually a lot lower than the equivalent ETF,” Evans says. “ETFs are most useful were they replicate exposure to a risk that’s simply not available in the futures market. Style-based or theme-based exposure is often not available in any form other than ETF. Likewise, an ETF can often serve as an access product to a regional market where there is no other practical alternative.”
Restricted opportunities Another of the major advantages for investors in ETFs is that they are more accessible than derivatives, starting as they did as a tool for retail investors more than institutional investors. Nevertheless there are limits on their use for long-only buy-side firms depending on the restrictions within a mandate. “It depends what clients they put in there as to whether you are allowed to trade derivatives, futures or ETFs; it is on a fund-by-fund basis so sometimes you can’t use futures and sometimes you can’t use ETFs,” says one long-only equity trader for an Asian fund manager. “You have to use whatever means you have. Typically ETFs are quite expensive so they are
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DERIVATIVES
“ETFs are most useful were they replicate exposure to a risk that’s simply not available in the futures market.”
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JON EVANS
CEO, Abiding Capital
ETFS AND FUTURES the last thing that we would consider. We would rather use a futures contract to replicate any exposure that we want rather than an ETF.” However, he says that there is often a shortage of liquidity in futures contracts within the region, a consequence of tight market rules such as ID markets and regulations that limit liquidity such as restrictions on short-selling. “I wish more exchanges had futures contracts instead of ETFs; our job is to beat the index not to buy index exposure,” he says. Deats observes that trading futures carries basis risk and as a result, any changes in dividends can significantly affect the position, particularly as dividends can move from one contract to another. “For example, a situation recently occurred in Hong Kong in the Hang Seng Futures market whereby the dividend moved from one month to another for one firm and significantly affected the price of futures,” he says. “This was beyond the investors’ control and exposed these risks more openly.”
Arid markets Quantitative traders can arbitrage the premium discount of the ETFs and in turn make the ETF more liquid. However liquidity of both futures and ETF products is a significant challenge to developing strategies, as it affects the ability to set an ETF off against a future but a combination of legal and market structural factors also have to be weighed up warns Jack Wang, head of sales at ETF provider CSOP Asset Management. “If we talked about the Asian market in particular there are two barriers that we are seeing,” he says. “The number one barrier is really the [accessibility] restrictions that the capital market faces. For example in China the CSI 300 future is really almost the world’s most traded future, but it is very restricted to foreign investors. Although under QFII and RQFII there are some relaxations on the rules of trading futures, it is strictly for hedging purpose and the quota is very limited.” In the meantime ETFs have seen costs falling, improving their attractiveness. “In the last few years, ETF management fees have contracted WWW.ASIAETRADING.COM
across the board to the point where it is sometimes cheaper than passively managing the index at an investor level, especially in the emerging market space,” says Deats. Wang believes that the broader trend suggests that restrictions to trading futures are gradually being removed in a lot of markets. “I think that most traders will become more able to trade derivatives,” he says. “However regulators are cautious on the fact that derivatives may pose bigger risk. There is a fixed income future tracking the five-year government bond index in China, but so far the authorities only allow securities houses and future companies to trade it and so insurance companies and banks cannot trade it and therefore they can’t use it to hedge it for example.” Accessibility is not only a challenge as a result of local Asian markets but also due to the rules of cross-border trading within markets like the US. “For a US entity to trade a certain future product, I think the future needs to be SEC approved so a lot of US institutions can only use futures which have regulatory approval,” says Wang. “For China, domestic listed futures are generally not yet approved by the SEC, so even [where] some institutions were able to access the market based on quota restrictions, there are still certain regulatory barriers to foreign investors to be in the market.” Evans argues that while at the retail level, ETFs provide a cheap and readily available source of beta, they are often tied to an index which he says can be flawed. “Tracking a cap-weighted benchmark can provide a false sense of security because the index itself is simply based on the size of underlying equities rather than the real value drivers such as free cash flow and balance sheet quality,” he says. Smarter products are entering the market and the real incumbent to these is the active fund manager he argues, “This is one reason why we are seeing so much interest.” For traders that are using index products, a combination of assets provides a sound model, argues Wang. “Futures provide very good hedging for users of the ETF and by using futures together with the ETF you get a more diversified strategy,” he says. July 2014
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VOLATILTY
S&P/ASX Volatility Index 23 40 21 35 19 30 17
Last Last
15 25
200DMA 200DMA
13 20 11 9 15 May-13
August-13 Aug-13
November-13 Nov-13
February-14 Feb-14
May-14 May-14
CBOE China ETF Volatility Index (“VXFXI”) 40 35 30
Last
25
200DMA
20 15 May-13
Aug-13
Nov-13
Feb-14
May-14
Hang Seng Indexes- Volatility Index 30 28 40 26 24 35 22 30 20 18 25 16 14 20 12 15 10 May-13 May 2 2013
20
Asia Etrader
Last Last
200DMA
200DMA
Aug-13 n
July 2014
Sep 26 Nov-13 2013
Feb-14
Mar 3 2014May-14 WWW.ASIAETRADING.COM
VOLATILTY
India NSE Volatility Index 4023
23
3521
21
19
19
17
17
15
15
13
13
11
11
30
25 20
15
10 9 May-13
May-13 5/1/2013
Last Last 200DMA 200DMA
9 Aug-13 Sep-13 5/1/2013 8/1/2013
Nov-13
Dec-13 8/1/2013 11/1/2013
Feb-14
Jan-14 11/1/2013 2/1/2014
May-14
April-14 2/1/2014
Volatility Index Japan (VXJ) 40 50 45 35 40 30 35
Last Last
30 25
200DMA 200DMA
25 20 20 15 May-13
July 23 2013 Aug-13
Oct 21 2013 Nov-13
Jan 23 2014 Feb-14
Apr 23 2014 May-14
KOSPI 200 Volatility Index 22.00 40 20.00 35 18.00 Last Last 200DMA
30 16.00 25 14.00
200DMA
20 12.00 15 10.00 May-13 2013/05/02 WWW.ASIAETRADING.COM
Aug-132013/07/29
Nov-13
Feb-14 2013/10/29
May-14 2014/01/24 July 2014
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DERIVATIVES
Source: Exchange Websites
TOP 50 Futures Contracts By Volume in Asia for May - June 2014 Exchange
Product
Vol. June 2014
Vol May 2014
Zhengzhou Commodity Exchange Shanghai Futures Exchange Dalian Commodity Exchange National Stock Exchange of India Zhengzhou Commodity Exchange Shanghai Futures Exchange Dalian Commodity Exchange Shanghai Futures Exchange Zhengzhou Commodity Exchange Dalian Commodity Exchange Zhengzhou Commodity Exchange Dalian Commodity Exchange Dalian Commodity Exchange Shanghai Futures Exchange MCX-SX Dalian Commodity Exchange Dalian Commodity Exchange Australian Securities Exchange Dalian Commodity Exchange Australian Securities Exchange Shanghai Futures Exchange Shanghai Futures Exchange Shanghai Futures Exchange Korea Exchange Dalian Commodity Exchange Zhengzhou Commodity Exchange Australian Securities Exchange Zhengzhou Commodity Exchange Multi Commodity Exchange Multi Commodity Exchange Multi Commodity Exchange Osaka Securities Exchange Zhengzhou Commodity Exchange Bursa Malaysia Multi Commodity Exchange Dubai Gold & Commodities Exchange Multi Commodity Exchange Multi Commodity Exchange Dalian Commodity Exchange Tokyo Commodity Exchange Multi Commodity Exchange Multi Commodity Exchange Multi Commodity Exchange Zhengzhou Commodity Exchange Tokyo Financial Exchange Multi Commodity Exchange Multi Commodity Exchange Multi Commodity Exchange Multi Commodity Exchange Multi Commodity Exchange
Rapeseed Meal Steel Rebar Soy Meal US Dollar/Indian Rupee Pure Terephthalic Acid (PTA) Silver Iron Ore Rubber White Sugar Hard Coking Coal Flat Glass Coke Linear Low Density Polyethylene (LLDPE) Copper US Dollar/ Indian Rupee Soy Oil Palm Oil 3 Year Treasury Bond No. 1 Soybeans 10 Year Bond Gold Aluminum Zinc Futures US Dollar Fibre Board Methanol 90 Day Bank Bills Rapeseed Oil Silver Micro Crude Oil Natural Gas 10 Year JGB Cotton No. 1 Crude Plam Oil Silver Mini US Dollar/ Indian Rupee Nickel Copper Corn Gold Nickel Mini Copper Mini Silver Thermal Coal US Dollar/ Japanese Yen Gold Mini Lead Mini Zinc Mini Aluminum Mini Gold
80,436,158 44,345,354 40,959,040 24,282,350 21,796,718 21,412,230 15,535,482 14,229,782 12,460,982 12,018,286 11,804,392 11,157,544 10,866,512 9,876,206 9,625,982 9,369,174 8,089,090 4,809,856 4,131,768 3,731,399 2,988,526 2,951,886 2,899,030 2,837,504 2,362,432 2,247,140 1,821,636 1,737,730 1,488,952 1,263,593 895,768 894,009 800,368 786,356 738,894 731,333 716,175 661,419 596,822 562,274 519,775 502,424 447,887 430,038 397,468 374,285 353,466 335,374 309,760 299,118
58,495,644 45,983,966 33,653,666 25,361,770 11,805,536 16,148,534 15,248,156 16,410,068 16,188,742 15,909,986 6,796,908 12,727,712 9,203,138 10,621,822 11,422,448 7,713,938 7,606,142 3,728,359 7,936,876 1,888,910 3,170,914 1,816,374 796,206 3,113,109 3,102,860 1,077,706 2,363,657 2,064,762 1,588,026 1,225,192 850,228 534,591 468,554 669,544 781,703 809,285 1,017,262 572,987 1,006,384 553,903 686,719 441,940 454,121 516,534 542,531 383,078 302,593 245,920 298,554 314,087
21,940,514 (1,638,612) 7,305,374 (1,079,420) 9,991,182 5,263,696 287,326 (2,180,286) (3,727,760) (3,891,700) 5,007,484 (1,570,168) 1,663,374 (745,616) (1,796,466) 1,655,236 482,948 1,081,497 (3,805,108) 1,842,489 (182,388) 1,135,512 2,102,824 (275,605) (740,428) 1,169,434 (542,021) (327,032) (99,074) 38,401 45,540 359,418 331,814 116,812 (42,809) (77,952) (301,087) 88,432 (409,562) 8,371 (166,944) 60,484 (6,234) (86,496) (145,063) (8,793) 50,873 89,454 11,206 (14,969)
404,889,747
366,621,645
38,268,102
Total 22
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Difference
Type Agriculture Metal Agriculture Currency Commodity Metal Commodity Commodity Commodity Commodity Commodity Commodity Commodity Metal Currency Agriculture Agriculture Interest Rate Agriculture Interest Rate Metal Metal Metal Currency Commodity Commodity Interest Rate Agriculture Metal Energy Energy Interest Rate Commodity Agriculture Metal Currency Metal Metal Agriculture Metal Metal Metal Metal Commodity Currency Metal Metal Metal Metal Metal
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DERIVATIVES
Top 20 Stock Index Futures for May - June 2014 Exchange
Index
Vol. May 2014
Vol. June 2014
China Financial Futures Exchange Osaka Securities Exchange National Stock Exchange India Korea Exchange Osaka Securities Exchange Singapore Exchange Osaka Securities Exchange Singapore Exchange Thailand Futures Exchange Singapore Exchange Hong Kong Exchanges TAIFEX Australian Exchange Singapore Exchange Hong Kong Exchanges TAIFEX Hong Kong Exchanges Osaka Securities Exchange Hong Kong Exchanges Bursa Malaysia
CSI300 Nikkei 225 mini S&P Nifty KOSPI 200 TOPIX FTSE China A50 Nikkei 225 Nikkei 225 SET 50 SGX CNX Nifty HHI TAIEX SPI 200 MSCI Taiwan HSI TAIEX mini MSI TOPIX mini MHI KLCI
13,164,637 12,544,513 6,261,131 2,607,706 2,516,236 2,295,587 2,282,625 2,092,333 1,808,512 1,552,325 1,515,945 1,446,977 1,278,432 1,231,527 1,231,332 705,949 470,976 381,346 183,528 158,973
13,939,261 11,636,454 7,401,147 2,649,047 995,462 1,993,356 1,306,103 1,538,320 1,439,783 1,786,419 1,536,489 1,831,339 588,341 1,402,639 1,264,248 958,100 520,589 360,194 199,479 163,350
(774,624) 908,059 (1,140,016) (41,341) 1,520,774 302,231 976,522 554,013 368,729 (234,094) (20,544) (384,362) 690,091 (171,112) (32,916) (252,151) (49,613) 21,152 (15,951) (4,377)
Total Region
55,730,590
53,510,120
2,220,470
Top 5 Gainers
Top 5 Decliners
Exchange
Product
Zhengzhou Commodity Exchange Zhengzhou Commodity Exchange Dalian Commodity Exchange Shanghai Futures Exchange Zhengzhou Commodity Exchange
Rapeseed Meal Pure Terephthalic Acid (PTA) Soy Meal Silver Flat Glass
Net 21,940,514 9,991,182 7,305,374 5,263,696 5,007,484
Top 5 Agriculture Futures Exchange
Product
Zhengzhou Commodity Exchange Dalian Commodity Exchange Dalian Commodity Exchange Dalian Commodity Exchange Dalian Commodity Exchange
Rapeseed Meal Soy Meal Soy Oil Palm Oil No. 1 Soybeans
Total
WWW.ASIAETRADING.COM
Product
Net
Dalian Commodity Exchange Dalian Commodity Exchange Zhengzhou Commodity Exchange Shanghai Futures Exchange MCX-SX
Hard Coking Coal No. 1 Soybeans White Sugar Rubber US Dollar/ Indian Rupee
(3,891,700) (3,805,108) (3,727,760) (2,180,286) (1,796,466)
Volume 80,436,158 40,959,040 9,369,174 8,089,090 4,131,768
Exchange
Product
Volume
Zhengzhou Commodity Exchange Dalian Commodity Exchange Shanghai Futures Exchange Zhengzhou Commodity Exchange Dalian Commodity Exchange
Pure Terephthalic Acid (PTA) Iron Ore Rubber White Sugar Hard Coking Coal
142,985,230 Total
Product
National Stock Exchange of India US Dollar/Indian Rupee MCX-SX US Dollar/ Indian Rupee Korea Exchange US Dollar Dubai Gold & Commodities Exchange US Dollar/ Indian Rupee Tokyo Financial Exchange US Dollar/ Japanese Yen
Total
Exchange
Top 5 Commodity Futures
Top 5 Currency Futures Exchange
Net
21,796,718 15,535,482 14,229,782 12,460,982 12,018,286
76,041,250
Top 5 Metal Futures Volume
Exchange
Product
Volume
24,282,350 9,625,982 2,837,504 731,333 397,468
Shanghai Futures Exchange Shanghai Futures Exchange Shanghai Futures Exchange Shanghai Futures Exchange Shanghai Futures Exchange
Steel Rebar Silver Copper Gold Aluminum
44,345,354 21,412,230 9,876,206 2,988,526 2,951,886
37,874,637
Total
81,574,202 July 2014
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BUYSIDE
S P E T LES T E S K HURD ION E R T A V A CANT I FIC I T M S A IFI ER F N T V A I G T I D G N S N R E I E E MO HE AC E T A T F H IDERS OF S ION ’ T S S. T R N C A A O O V I I T O F PRO TR UT ES S T T G I V N A IN ST IN ET INI N N I A A G SI OF P er
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Asian investors can access global equity market easily via Asian, US domiciled and European UCIT ETFs, yet they have been slow to appreciate their qualities. They generally like volatility and are stock pickers, according to William Chow, managing director of ETF business at Value Partners. “ETFs offer diversification so they are not natural products for them, but they are becoming more familiar with their attractions, especially for non-regional markets,” he says. Asian investors tend to use ETFs tactically for short-term exposures to markets or to equitise cash. “However, their perspectives are changing, and they are starting to use them more strategically for longer holding periods,” says Douglas Yones, head of ETFs (Asia), Vanguard Group. Asia Etrader
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There are clear signs that interest in Asia is rising. Net purchase of UCIT-regulated ETFs by investors in Asia increased almost six times in 2013 compared to 2012, to US$916 million from US$132 million, and year-to-date (11 June) net inflows have already reached US$1 billion.
ETFS ARE FIT FOR MULTI-PURPOSES ETFs have several appealing features for both institutional and retail investors. They provide access to restricted markets where there are quota limits, give exposure to markets where a fund manager lacks sufficient knowledge about individual stocks, offer diversification benefits and can be used as a cost-effective way to equitise cash in the shortterm.
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In fact a wide range of fund manager throughout the world use ETFs for a host of reasons, so there is huge potential to develop interest in Asia, according to Jane Leung, head of iShares Asia Pacific at Blackrock. They include multi-asset allocators who simply want exposure to market direction and also funds with narrower investment mandates. “The increasing granularity of fund managers’ mandates [during the past 10 years] is conducive to the use of highly specific ETFs,” she says. “ETFs offer them many options which are part of their increasing appeal. It’s possible to buy sector ETFs (for instance, based on capitalization and industry) and growth or value ETFs, as well as fixed income and commodity ETFs,” says Yones. In addition, when they have a liquidity sleeve, traditional longonly portfolio managers temporarily equitise cash with ETFs, gaining broad exposure to a market before redirecting cash to selected stocks. “Fund managers with an asset allocation mandate find ETFs especially useful; stock pickers have less use for them [in the long-run] of course because clients expect them to add extra value through selection expertise,” says Dr. Hing Tang, managing director and head of quantitative strategy business unit, BOCI Prudential Asset Management, a Hong Kong-based wealth management firm. Private banks build structured products for their return-hungry private wealth clients with ETFs as the underlying, often topped with an option premium to enhance yield; and as they have grown their fee-based discretionary businesses in recent years low-cost, liquid ETFs have become an efficient allocation tool. Hedge funds also deploy them for arbitrage strategies because of their liquidity, and they are convenient for portfolio managers WWW.ASIAETRADING.COM
BUYSIDE
However, sophisticated investors sometimes use synthetic ETFs for specific and true sector or market exposure with less tracking error or for leveraged structures, often two-three times the inverse of the index, according to Yones. In addition, “although investors generally prefer physical ETFs to avoid extra layers of risk, it is sometimes simply more practical to buy a synthetic,” says Tang.
who lack expertise in a particular market or sector, and essential if a favoured market is restricted by quotas, liquidity or cost, such as China, Brazil, India, Korea, Russia, Taiwan and Vietnam.
Some issues apply equally to physical and synthetic ETFs. Tax treatment is often complex and is affected by the domicile of both the investor and the ETF issuance which can raise costs significantly. For example, foreign holders of US ETFs pay withholding tax and capital gains tax. UCIT ETFs, especially those listed in Dublin, are generally more tax-efficient for Asian investors.
“Some markets are difficult to access or gain sufficient diversification through normal stock selection, which often makes liquid, low cost ETFs a better choice,” says Leung. For instance, the largest ETF in Asia, the iShares FTSE A50 China Index (2823) has grown to around US$7 billion in assets under management from just US$40 million between 2004 and 2008. It is a way for investors without direct R/QFII quotas to gain access to Shanghai- or Shenzhen-listed shares via a syntheticallyreplicated structure. Rules introduced last year by the Chinese authorities now allow offshore investors access to physically-replicated China ETFs through RQFII, and physical ETFs linked to A-shares have been launched, for example, by Deutsche Asset & Wealth Management in partnership with Harvest. But the uncertainty of capital gains tax treatment for foreign investment into Chinese equities and poor liquidity in some RQFII funds means that synthetic ETFs have an important role despite the media, investor and regulatory backlash against them in 2008-2009.
PHYSICAL OR SYNTHETIC ETFS
Synthetic ETFs are issued in a P-note derivative format by a bank or asset manager which exposes the investor to counterparty risk and to mismatched collateral – although tougher criteria have been set by regulators sine the global financial crisis. But there has been a widespread shift among investors and providers to physical ETFs from synthetics because they are perceived as safer and more transparent, providing direct exposure to a market and reducing layers of risk, point6s out Leung. For instance, Value Partners and Vanguard now only offer physical ETFs.
“Investors face beta risk with physical ETFs, but holders of synthetic ETFs are also vulnerable to additional concerns such as counter-party risk and mismatched collateral,” says Chow. WWW.ASIAETRADING.COM
Yet even post-tax, ETFs have advantages over the costs of buying individual shares. Alpha is often insufficient to cover expenses [such as broker commission, wide bid-ask spreads and registration] of buying a basket of individual stocks in an undeveloped market, so buying an ETF can be an attractive alternative, notes Tang.
EARLY STAGE
But, there is no escaping the fact that the Asian ETF market itself is still at a nascent stage. Indeed, “it’s quite boring compared to European UCITs and RTFs in the, where assets under management are now around $2.5 trillion),” he says. Fees are much higher than in the US and Europe too, 50pb-1% in Asia compared to 5bp10bp because there is less scalability. Also, Hong Kong retail investors are not very interested in the asset class, largely because it is contrary to a stock-picking, IPOstagging “culture of instant gratification,” he adds. “It is a slow process persuading them about the diversification benefits of ETFs,” agrees Leung. There were 95 ETFs, with 133 total listings, in Hong Kong with around US$33 billion assets under management at the end of April, according to Vanguard, which launched three new low cost physical ETFs in Hong Kong in June, with exposures to Japan, developed Europe and Asia ex-Japan. The Hong Kong Financial Secretary’s announcement last year that he would remove stamp duty on ETFs might give the market a boost. July 2014
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REGULATION
A
ccess to exchange-traded funds (ETFs) will be improved as passporting and mutual recognition of funds between different jurisdictions gain favour among regulatory authorities in Asia Pacific. The first ETF was launched in the region in 1999, two years before ETFs appeared in Europe, yet Asian ETFs (including Japan) form less than 10% of global ETF trading. Investor education and familiarity with the product has been an ongoing issue as most retail participants prefer to invest in individual securities that are more liquid than the ETF’s. Fragmentation is another culprit. Due to a large number jurisdictions and regulations, ETF providers find it difficult to standardise and distribute ETF’s regionally.
Larry Cao
Rex Wong
“For the Chinese fund markets, retail demand for ETF products, for asset allocation needs, will take longer to build...”
“[Chinese asset managers] will also need to focus on developing their capabilities to invest overseas and run portfolios of nonChinese investments, either through joint ventures and strategic partnerships...”
Head of content, CFA institute
Managing director, BNY Mellon
The mutual recognition of funds scheme between Hong Kong and China will provide easier access to both markets to funds houses in the two jurisdictions. The timeline for the implementation of the scheme is yet unclear but market participants expect formal approval to come at the latest in two to three months. Although ETF’s are not explicitly mentioned on the regulatory agenda there is general agreement that the development will be a watershed for the ETF market in Asia going forward. With Chinese fund managers offering products in Hong Kong, this may negatively impact the fast growing RQFII ETF market here, according to Maria Hsui, partner for asset management at Pricewaterhouse Coopers in Hong Kong. However, she says that Hong Kong managers are increasing their emphasis on tapping the Chinese market. “China is a much bigger market than Hong Kong, so fund managers in Hong Kong are more excited about the Hong Kong-China mutual recognition than their counterparts in China,” she says. According to Rex Wong, managing director for Asia-Pacific asset servicing at BNY Mellon, once mutual recognition is in play, Chinese asset managers with an RQFII license will need to begin looking outside of Hong Kong for investors
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REGULATION
that don’t have access to the China market. “They will also need to focus on developing their capabilities to invest overseas and run portfolios of non-Chinese investments, either through joint ventures and strategic partnerships, which is a good short-term approach, or building in-house teams, which is a longer-term process,” he says. Uncertainty on whether Chinese tax laws, which provide domestic investors with preferential treatment for investment into ETFs and other open-ended funds would apply to foreign investors is among the kinks that will need to be ironed out once the scheme is approved. Further, according to Florence Yip, tax partner for Pricewaterhouse Coopers, there is uncertainty on whether Chinese investors will get the same treatment for investing in Hong Kong domiciled ETFs. “If Chinese investors don’t get similar China tax exemption investing in China funds concessions for investing in Hong Kong ETFs, then this income ETF would be taxed as China tax worldwide income domestic and global income. In Hong Kong, on the other hand, investors not carrying on business in the jurisdiction are not subject to Hong Kong tax. Only Hong Kongsourced income is taxed,” she says. Wong at BNY Mellon says that some products allowed in Hong Kong are not permitted in the mainland. For example, ETFs in China must be physically-backed whereas synthetic ETFs are permitted to be issued in Hong Kong. He does not expect synthetic ETFs to be allowed in China under the mutual recognition scheme, at least not until regulators in the mainland are comfortable with the level of awareness for these products among domestic investors. Jane Xue, audit partner for financial services group at PwC China, says that in the ETF domain, the harmonization of regulatory frameworks may not be as difficult as the harmonization of trading, settlement and operational practices between the two markets. Since, the formation of Chinese ETF practices has been heavily influenced by the development of the Chinese securities market,
there are significant differences in ETF trading and settlement rules and operations between China and other mature markets. “If Chinese ETFs are distributed in Hong Kong, integrating the new distribution channel and practices into the existing operations of Chinese ETFs will be a real challenge. This challenge, in connection with other commercial considerations, may cause fund management companies in China to focus first on traditional passive funds under the mutual recognition scheme,” she says. For their part, regulators in Hong Kong have taken steps to support the market for ETF’s. The Hong Kong Securities and Futures Commission decided to waive stamp duty for all ETFs traded in Hong Kong. A stamp duty of 0.1% was applied to ETF’s where 40% or more of the underlying consisted of Hong Kong securities. Additionally, according to Hsui at Pwc, the Hong Kong pension regulator is encouraging more offerings of low-cost passive investments for investment by mandatory provident fund schemes. “This will be advantageous for the growth of index tracking funds in Hong Kong, including ETFs,” she says. However, Hsui says Investor education is important for attracting retail investors to the ETF market, as current investors are mostly institutional with less than 30% participation by retail investors. Larry Cao, head of content for CFA institute in Hong Kong, agrees adding that institutional investors are already familiar with the global diversification process aided by ETFs and that it is the retail investors that will drive the success of mutual recognition scheme for ETF providers. “There is a general lack multi-asset products and an understanding of diversification among retail investors which still comprise almost 80% of mutual fund ownership. For the Chinese fund markets, retail demand for ETF products, for asset allocation needs, will take longer to build,” he says noting that the move to a fee-based model for financial advisers has proved important in accelerating the adoption of ETFs in overseas markets.
ETF trading in Asia is set to grow as regulators focus on structural reform and on providing access to their respective markets to non-local fund providers.
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WHO'S WHO
CURTIS TAI In keeping with our exchange-traded fund (ETF) issue Asia Etrader spoke with Curtis Tai manager at China Asset Management, a Hong-Kong based issuer, on the state of the industry in Asia. Asia Etrading: How did you get started in the ETF space?t Curtis Tai: It’s a fast and growing space, and I was fortunate to have the opportunity to work at the largest ETF asset manager in Taiwan. We promoted ETFs and ETF trading strategies in Taiwan as well as advised asset managers and exchanges in South East Asia on ETFs. I loved the strategies possible through using ETFs including asset allocation, index arbitrage, and pair trading. The endless amount of uses for ETFs intrigued me and I was lucky to have the opportunity to work with many investors and traders. Since then, I’ve stayed in the industry and continued to try to develop ETFs and expand its offerings and uses in the Asia region. AE: Why have ETFs not been a popular product in Asia? CT: I do not believe that they are not popular. However, there is still a lot of education that needs to be done. Asset allocators in developed markets, particularly the US, use ETFs for easy access, and they are well versed in using them to execute their investment strategies. These include registered investment advisors (RIAs) and financial advisers, which aren’t frequent in Asia. One example is that many money managers in the US are moving towards a fee-based compensation approach. This alters the advantage mutual funds have of rebates to distributors. Additionally, investment behavior is different. Investors in Asia tend to prefer absolute capital growth rather than capital preservation. ETFs following indexes are often not as volatile as single stocks, and thus, reducing their attractiveness. However, we are seeing a lot of developments in Asia and investors are increasingly more educated. I believe the ETF market has a lot of growth potential. Another potential issue is that the markets are separated in Asia. It is not common for investors - retail especially - to cross into another Asian market to trade the ETFs listed there. However, Asian countries are negotiating passporting in order to facilitate simpler local trading of securities listed in other markets. This will help to increase assets and turnover of ETFs around Asia.
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“
WHO'S WHO
Managers in Asia must be more careful and certain about the ETFs that they launch in Hong Kong since funds are more expensive to manage…”
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WHO'S WHO AE: How has the ETF space changed in the last five years? CT: It has grown significantly. In terms of product offerings, ETFs are spanning across active ETFs, smart beta, fixed income, and frontier countries with limited access and liquidity. Additionally, the use of ETFs has also expanded, with global AUM for ETPs doubling in the last five years from 1.2 trillion in 2009 to 2.4 trillion predicted for the end of 2014. Additionally, investors are getting increasingly sophisticated in the ways that they use ETFs and there’s more coverage of ETF products in research notes, sell-side reports, and media. We are seeing both institutional investors and retail investors understand the ETF structures and indexes more and more each year. Thus, we have seen increased use of ETFs for such strategies as tactical and asset allocation. AE: What underlying assets offer most opportunities for ETPs? CT: In Asia, I think there’s still a lot of room for new ETFs. Currently, the active and tradable ETFs are still mostly broad-based market indices, but the market would be interested in sectors and other thematic indices. In the short term, we’re likely to see more sectors and fixed income products launched. In the long term, there will be opportunities in smart beta and alternative indexing strategies.
“
Asia is still at a stage where it needs themes like sectors, different market caps, and dividends.”
AE: What are the some of the challenges for constructing / creating an ETF in Asia? CT: Firstly is that the cost of launching a product seems to be much more expensive and time consuming than in US, where managers are able to concurrently file for multiple products. This allows for the manager to take less risk when launching ETF products. Managers in Asia must be more careful and certain about the ETFs that they launch in Hong Kong since funds are more expensive to manage and typically require more resources and longer time to get approved. This makes it sometimes difficult to plan the timing and pipeline of ETF launches. It also makes it difficult to develop new and innovative products. Another challenge is the difference in regulations in the various countries. Unlike Europe, where UCITs is the standard, and passporting is conventional, regulations governing funds and financial institutions in each country are completely independent from one Asian country to another. Passporting is currently being
“
Even if the fund is UCITs compliant, there are still investment limits.”
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discussed amongst multiple countries in Asia. If achieved, this could potentially increase the accessibility and efficiency of the ETF market significantly. Rather than fragmenting the market, investors would have access to the largest and most liquid ETFs across the region. Additionally, they would also have a greater number of thematic ETFs listed on each local market. AE: Are there markets in Asia that make ETF issuing/development more favourable than others? CT: It depends on the type of ETF. Since the markets have different regulations, every market has its advantages and disadvantages. For instance, Korea, Japan, and now Taiwan allow for leverage/ inverse ETFS while Hong Kong does not. Hong Kong and Japan allow swap based ETFs while Taiwan does not. Additionally, since each country has different operational procedures and fund structures, development of an ETF could be easier as settlement systems handle newer operations.
“
WHO'S WHO
It is not common for investors - retail especially to cross into another Asian market…”
We have also seen drastic developments when governments develop markets and allow for new products. The RQFII products in HK and expansion of Taiwan ETFs to include leverage/inverse are some examples. AE: How do you construct your ETF underlying portfolio? CT: Our ETFs are currently fully-replicated physical ETFs. We replicate the index completely using the exact constituents at the weightings of the index. Some ETFs, however, require sampling replication or active management. For instance, if an index has too many constituents, the manager will be forced to replicate the performance using a limited number of constituents or other vehicles. Additionally, for products such as fixed income, where the liquidity for certain bonds may be limited, the manager will need to actively select fixed income securities that will correlate with the index. In every strategy, the investment objective will still be to track the performance of the underlying index, unless the ETF is an active ETF. AE: Should ETFs be actively managed? CT: We are seeing more demand for actively managed ETFs. These are active strategies in the structure of ETFs. However, one attractive quality of ETFs is the transparency of the holdings. But this goes against active management, where managers do not want their strategies to be copied or publicly available. ETFs are convenient due to the tradability and cost effectiveness of
“
…there will be opportunities in smart beta and alternative indexing strategies.”
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WHO'S WHO
“
…there is still a lot of education that needs to be done.”
the structure. If these issues can be met through creative index compilation, for instance, through fundamentals based or alternative indexing, then there is a lot of potential in actively managed ETFs. AE: Do ETF advisors provide a necessary role in the industry? CT: ETF advisors help to educate and select ideal ETFs for investors. This is extremely necessary where education is still needed in Asia, for both the uses of ETFs and unique qualities of each product. With so many ETFs available, advisors help to filter out and identify the proper ETFs for each investors’ requirements. As the industry continues to develop new ETFs, ETF advisors will play an important role through their unbiased research and education. AE: Are the new regulations coming from the US and Europe making sales of these products an opportunity or a problem? CT: This is actually a problem for locally listed ETFs and funds. For non-US listed ETFs and funds, there are US selling restrictions, which restricts the sale of these funds to US investors. Thus, to access US investors, many Chinese fund houses are partnering with US firms to launch US domiciled funds. In Europe the restrictions are more lenient, but many funds are UCITs funds which presents the same problem. UCITs rules generally restrict the investment into non-UCITs funds. This constrains the amount of capital that can be invested into Asia domiciled-ETFs and funds, which is usually a small percentage of the UCITs fund’s assets. Even if the fund is UCITs compliant, there are still investment limits. AE: What will the ETF space look like in five years? CT: We are seeing that the Asia region is following the type of offerings in the developed markets. But it will take some time before we see the same plethora of themes investible. Asia is still at a stage where it needs themes like sectors, different market caps, and dividends. Without the different product offerings, investors are very limited to the ETF strategies they can execute. With interest and assets growing in the ETF space, we’re seeing increased launches and more innovation. However, this can be sped up with the support of regulators. In the US, the SEC does not need to approve each fund, but in Asia, regulators review and approve each individual fund, making the launch process very costly and resource intensive. We’ll see the ETF space grow much more rapidly if the cost of launching ETFs decreases. As ETFs are meant to be a low cost product, this will benefit the investors as well.
“
We are seeing more demand for actively managed ETFs.”
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OPINION POLL
WHAT IS NEEDED TO HELP ETF PRODUCTS GROW IN ASIA
O
ur opinion poll this issue centres around the problems curtailing ETF growth in Asia. Representing less than 10% of global ETF assets under management, the biggest factor impeding the development of Asia ETF market was ‘education’, garnering 38.89% of the votes. Low trading volumes is perceived as low liquidity which tends to make investors think twice. They do not realise that these products are backed by market makers and issuers who can buy more of the underlying to create more ETF units as needed. The Lehman mini-bond fiasco has made Hong Kong retail think twice about structured products they do not understand and instead prefer to invest in the short term via IPOs and day trading. Cultural mind-set and lower transaction costs both tied for second with just over 22% of the votes. We hinted at some of the cultural ideals above but to expand on the day trading preference in Asia looking at ETFs in Japan and Korea some of the most popular ones seem to be the leveraged ETFs. These are more risky products providing greater potential for loss or gain than other kinds. Perhaps, expanding these types of ETFs would be the way forward. High transaction costs in the form of management fees on top of trading fees push people away WWW.ASIAETRADING.COM
particularly with a short-term horizon. Creation and redemption improvements made up just 11% of respondents answers. Some ETFs in Asia have very early cut off times making timely entry/exit difficult for some. Additionally, there is a need for agile technology rather than Excel files and faxes which are the norm rather than the exception. There is a need for improvement in our opinion but it appears there are more pressing reasons for Asia’s stifled ETF industry. The last response with just 5% of the votes was lifting market restrictions. This was our regulatory constituent of the poll and we had expected this to capture more votes than it did. Passporting, which allows one country to sell their ETF product in another is a common practice in Europe but not Asia. Only in April has there been some regional consultation papers on this subject but is still a long way away. RQFII has opened up China’s market for ETFs a little but as we all know that market is still closed. It would appear that those interested in ETFs are looking either domestically or can access ETFs and their asset exposure in the large centers like New York. Regulation is not a hurdle to ETF development in Asia, informed investor appetite is. July 2014
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O&A
UNDERSTANDING ETF TRACKING ERRORS Hongsong Chou, Ph.D.
Dr. Hongsong Chou is a Managing Director of Citic Securities, Inc. and a Deputy General Manager of the Citics ITAQS, a wholly owned subsidiary of Citic Securities that focuses on liquid product trading platform, strategies and execution algorithms development.
After an explosive growth in the 1990s and early 2000s, index tracking ETFs still attract both institutional and retail investors. According to Strategic Insight, about 280 billion U.S. dollars were invested in index funds and ETF funds in 2013 alone, about twice the amount invested in active funds in the same year. It is estimated that, by 2014, index ETF funds hold about 1.8 trillion USD worth of assets.
The advantages of ETF investing are low-cost in fund management and trading, tax efficiencies, intraday creation and redemption in connection with underlying shares, and the development of arbitrage strategies that involve ETFs. For certain markets that do not allow T+0 settlement (such as China), the creation and redemption of ETFs in real time can allow investors to trade ETFs in a round trip: if an ETF is traded in the secondary market above its NAV with a premium, an investor can buy underlying stocks (or a subset of stocks that collectively track closely the underlying index), create an ETF through the fund management company, then sell it on the secondary market; vice versa, if an ETF is traded with a discount, an investor can buy the ETF from the secondary market, redeem it to get underlying stocks, and sell the stocks in the market. In this way, an investor can buy and sell the same ETF within T+0. Because ETFs can be created and redeemed between investors and the fund companies who manage the ETFs, a large order to buy an ETF in terms of percentage of that ETF’s average daily volume may not necessarily lead to a significant impact on the price of ETF. In fact, the transaction of a large ETF order can
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often involve the creation and redemption of the ETF that does not happen in the secondary market. As a result, investors often call the availability of ETF liquidity associated with the creation/ redemption process the “shadow liquidity” of an ETF, which can be significantly bigger than the ETF trading volume in the secondary market. As a result, market impact cost of trading ETFs can be relatively low when compared with that of trading underlying stocks with similar demand for liquidity. For both retail investors who use ETFs to track certain broad indexes and institutional investors who use ETFs and index futures to trade index-ETF-stock arbitrage strategies, the dynamics and statistics of the tracking error between an ETF and an underlying index are important features to be understood and quantified. For investors who invest in arbitrage strategies, the fundamental belief is that the price level of index-tracking ETF, the corresponding index futures, and the portfolio of stocks that can replicate index behaviors should always try to converge to one another without significant difference. Otherwise, the “spread” should dissipate eventually and sometimes quickly. From risk management point of view, such “spread” is often quantified as “tracking error”, which measures the standard deviation of the temporal changes of the “spread”. Figure 1 illustrates the “spread” effect in cumulative measure. Both the Huatai CSI300 Index ETF and the Harvest CSI300 Index ETF are most liquid ETFs that track the CSI300 index. These two ETFs were launched on the same day as two of the earliest ETFs that can be used by both WWW.ASIAETRADING.COM
O&A
The tracking properties of the Huatai CSI300 Index ETF and the Harvest CSI300 Index ETF as compared to their underlying index, the CSI300.
Low cost diversified funds that track indexes are the best approach for 95% to 98% of Americans. – Charles Schwab
domestic investors and overseas investors (via the QFII scheme) to invest in this broad market index. However, as evidenced by the chart, the two ETFs have rather different tracking properties with the index. It may appear that the Huatai CSI300 Index ETF had larger tracking difference than the Harvest CSI300 Index ETF from November 30, 2012 to June 5, 2014; however, as measured by the standard deviation of daily return difference series, the Huatai CSI300 Index ETF has a slightly bigger tracking error of 1.64% (annualized) than the Harvest CSI300 Index ETF, which has a tracking error with the CSI300 Index of 1.53% (annualized) in the same period. There are two groups of factors that may cause high tracking errors of ETFs. One group is product-related, and the other group is trading-related. By construction, different ETFs handle various product-specific features differently. For example, certain types of ETFs have different rebalance schedules as compared to the underlying index, which can periodically lead to increased tracking errors. The size of cash component that ETFs often hold varies from fund to fund, which may lead to tracking error as well. Such cash component often corresponds to dividends and other fund-related expenses, which are often managed differently by different funds. Product-related factors for tracking errors can often be understood by studying fund prospectus in terms of rebalance schedule, management fee structure, treatment of dividends, and cash component structure, etc. Trading-related factors that affect tracking error are often related to how investors use ETFs as part of their investment strategies and the associated cost of doing so. The aforementioned WWW.ASIAETRADING.COM
example of intraday ETF trading can be appealing to investors in certain markets that cannot buy and sell an ETF product on the same day; however, it can be costly when the underlying stocks are first bought in the market with high broker commissions and exchange fees, not mentioning other implicit costs such as market impact. In certain markets such as Hong Kong, stamp tax duty can be quite expensive as well. When facing such costly operations, investors often have to “time” the market. That is, investors tend not to immediately arbitrage away the discrepancy between an ETF product and its underlying index (often through index futures) when it arises; rather, they wait until the tracking error is significantly big enough before they take actions. The fact that the Harvest CSI300 Index ETF has a bigger discrepancy in cumulative return than the Huatai CSI300 Index ETF yet smaller tracking error as illustrated in Figure 1, shows that investors may allow short-term discrepancies to form between indexes and their tracking ETFs until they arbitrage them away eventually. From trading operation point of view, it is not only that many investors allow the discrepancy to grow in short-term, but also that they trade on one side (ETF or index futures) first and let the alpha of the exposed side run for a while before they hedge on the other side (index futures or ETF). All such deliberate operations can lead to significant tracking error between an ETF and its underlying index to persist over certain period of time. Comparing with product-related causes for tracking errors, trading-related factors often exhibit intraday, short-term durations, and can be as important as product-related factors for investors to form a complete picture of how tracking errors between ETFs and their underlying indexes arise and persist in the market. July 2014
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EQUITIES
Asia ETF providers and AUM snapshot
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EQUITIES
Data as of May 2014 Source: Exchange websites
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FRAGMENTATION FOOTPRINT JUNE 2014
FRAGMENTATION
Highlights JUNE 2014 Turnover
Market Share
Volume billion
Billion USD
Nikkei 225%
shares
TSE
$508.44
92.80
54.11
SBIJ
$20.25
5.00 2.20
Chi-X Japan $9.08
Avg Trade
Average Trade
Size USD
Size Shares
34,631,391
$14,681
1,563
2.90
4,253,752
$4,761
682
1.27
1,908,569
$4,756
666
Japan
Figure: 1 4.5
SBIJ 5.00%, ChiJ 2.20% Since the implementation of the Small Tick Pilot Program (STPP) by the TSE the proprietary trading systems (PTSs) have continued to remain relevant and linger in a holding pattern with SBI Japannext (SBIJ) capturing 5.0% (Figure 2) of Nikkei 225 market share by value and Chi-X Japan (ChiJ) 2.2% (Figure 1). STPP was predicted to be the end of the PTSs, as it
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Chi- X JP Nikkei 225 Market Share Value %
4.0 3.5
Nikkei 225 Market Share Value %
3.0 2.5 2.0 1.5 Jul 5 2013
Sep 13 2013
Nov 22 2013
Feb 7 2014
Apr 18 2014
Jun 27 2014
Source: Chi-X Japan website
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FRAGMENTATION Figure: 2
Figure: 6
TSE Trade Size USD TSEAverage Average Trade Size USD
SBIJ Nikkei 225 Market Share Value % 7.50
18,000
7.00
17,000
6.50
16,000
6.00
15,000
5.50
Nikkei 225 Market Share Value %
5.00 4.50
TSE
14,000 13,000
4.00 3.50 Oct 7 2013
12,000
Dec 16 2013
Feb 24 2014
2013-07
May 5 2014
2013-11
2014-03
Source: Thomson Reuters Equity Market Share Reporter
Source: SBIJ website
Figure: 7
Figure: 3
Chi-X JP Average PI (bps) 7.0 6.5 6.0
Average PI (bps)
5.5 5.0
Nov 22 2013
Feb 7 2014
Apr 18 2014
Jun 27 2014
Source: Chi-X Japan website Figure: 4
SBIJ Top Stocks by Market Share
SBIJ Price Improvement Profile (bps) 30.00
25.00 Large Cap Avg PI (bps) 20.00
Medium Cap Avg PI (bps)
15.00
10.00
5.00 Jul 1 2013
Sep 9 2013
Nov 18 2013 Jan 27 2014
Apr 7 2014
Jun 16 2014
Source: SBIJ website Figure: 5
7,000 6,500 6,000 Chi-X Japan SBI Japannext
5,000 4,500 4,000 2013-07
2013-11
2014-03
% Primary PI (bps) Value (JPY) Name 5.42 22.61 9,050,162,700 TOYOSUI 31.65 16.36 5,593,657,400 SHOWDEN 24.71 16.26 6,057,845,300 UBE-IND 5.58 16.06 2,973,381,100 NISINFDH 8.58 15.21 2,591,062,400 SMI-OSK 18.73 15.15 3,233,473,500 MTI-E&S 14.58 15.04 2,536,616,100 NINPC-BK 18.72 14.99 8,152,546,100 K-LINE 8.97 7,154,653,660 14.9 YAMDADK 3.48 14.89 4,470,575,850 FAMILYM
ChiX J Top 10 Large Cap Stocks by Market Share
PTS Average Trade Sizes USD
5,500
Symbol 2875 4004 4208 2897 5232 7003 8327 9107 9831 8028
Symbol 4188 9531 5020 6861 8411 5104 9532 8309 8308 6501
Name MTBCM HD TKO-GAS JX KEYENCE MIZUHO NSTEELSM OSK-GAS SMTRUST RESONA HITACHI
PI (bps) 7.0 4.9 5.7 1.0 20.2 11.4 6.4 6.5 5.3 3.9
% Primary 7.15% 5.93% 5.79% 5.59% 5.52% 5.28% 5.19% 4.68% 4.51% 4.27%
Source: Thomson Reuters Equity Market Share Reporter
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Source: SBIJ June Statistics Report
Sep 13 2013
% Primary PI (bps) Value (JPY) Name 6.21 9.08 72,721,762,730 MUFG 21 12.9 61,062,381,670 MIZUHO 3.87 5.37 40,829,114,100 MIXI 12.64 12.15 NSTEELSM 34,540,948,000 4.82 9.27 33,632,191,500 HITACHI 3.61 2.43 30,833,802,334 NIKKEILV 8.08 10.78 30,587,911,800 TOSHIBA 4.64 5.68 NOMRAHD 28,382,080,190 7.63 8.11 27,459,168,500 MAZDA 5.71 1.99 22,117,732,480 AIFUL
Source: ChiX J April Statistics Report
4.5 Jul 5 2013
Symbol 8306 8411 2121 5401 6501 1570 6502 8604 7261 8515
Source: SBIJ June Statistics Report
SBIJ Top Stocks by Turnover
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FRAGMENTATION eliminated their tick step advantage, but it looks as though the market has adjusted and algorithms have been fine tuned. The 2nd phase of the STPP is scheduled for 22 July where subYen prices for names trading below 짜5,000 (US$49) will be introduced. We do not expect much impact to market share as SBIJ sees small cap executions of less than 20% on its venue and makes up only 6% of ChiJ. Small cap price improvement (PI) has been declining (Figure 4) since STPP began and will likely continue to do so on both venues. Given the illiquid nature of these securities, however, PI volatility will continue. The third and final phase of STPP is planned for mid-July 2015. Turnover across all three venues continues to be sluggish in the post-Abenomics world touching a low not seen since before January 2013 of less than US$500 million in May but bounced back 16%, in aggregate, in June to US$570 million. With the lower volatility (See page 21) average trade sizes increased quite a bit possibly reflecting more passive algo use as short timeframe trading saw less opportunities for alpha. The TSE saw the largest growth (Figure 6) in notional trade size at 16.3% from US$12,624 to US$14,681. SBIJ came in second (Figure 5) with a 10.5% increase month-over-month from US$4,310 to US$4,761 and ChiJ with just 5.6% to US$4,756
from US$4,505. With the summer months here we do not expect to see much in the way of volatility or turnover growth and larger trade sizes are likely to remain. A closer look at the top names trading on the PTSs (figure 7) reveals much the same for SBIJ with MUFG (8306) and Mizuho (8411) making up around 6.6% of total notional traded. The remaining top 8 comprise of just over 12% of notional. SBIJs top 10 accounts for close to 1/5 of all trading on that venue. In terms of market share it was mostly smaller cap names rising to the top for SBIJ which saw an average of 16.2 bps of PI. These securities make up about 2.5% of notional traded on that venue in June. ChiJs top PI figures are much less than their cross town rival averaging just 7.2 bps. Is execution quality a differentiator between SBIJ and ChiJ? There are several variables to consider. Mizuho (8411) appears on ChiJs top 10 list boasting a PI of 20.2 bps. That is quite a bit for such a liquid name. SBIJ listed PI for Mizuho at 21 bps. Both venues appear to be trimming the execution fat. ChiJ appears to have a broader mix of trading across names while the SBIJ seems to be more concentrated even though they reported execution across 1,613 names in June compared to 1,351 for the smaller PTS. SBIJ reported 849 securities trading with quotes on 2,965.
Highlights JUNE 2014 Turnover
Market
Volume billion
Billion USD
Share %
shares
ASX
$51.38
88.33%
24.65
Chi-X Australia
$6.79
11.67%
5.22
Avg Trade
Average Trade
Size USD
Size Shares
13,483,065
$3,811
1,829
2,569,590
$2,641
2,030
Trades
Australia Chi-X Aus Market Shares %
Figure: 8
Chi-X Aus 11.67%
Chi-X Aus Market Share % Continuous Trading %
During the week of 13 June Chi-X Australia (ChiA) reported a one-day total market share of 27.39% (20.5% for the week), its largest ever, with the continuous value reported at 15.83% also a new high (Figure 8). The difference in value are off exchange block trades or portfolio trades compared to ASX off-exchange trading though not including ASXs Centre Point. It appears Deutsche Securities sent a large program to ChiA responsible for 54% of executions on the venue that day. This off-market trading business looks hit and miss some days, though has been growing steadily. June turnover was down 9% to US$6.79 billion but up 1.9% on ASX to US$66.57 billion. On the surface it might seem odd that ChiA reported its
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Total Market %
21.00 19.00 17.00 15.00 13.00 11.00 9.00 Jul 12 2013
Sep 20 2013
Nov 29 2013
Feb 7 2014
Apr 17 2014
Jun 27 2014
Source: Chi-X Australia website
WWW.ASIAETRADING.COM
FRAGMENTATION Figure: 9
Price Improvement Chi-X Australia From July 2013 42.00
37.00
% Trade PI Average PI (bps)
32.00
largest market share for June in the face of lower turnover but we included the primaryâ&#x20AC;&#x2122;s auction data which does not have an auction. Without the ASX auction notional was down 3%. Price improvement (Figure 9) on ChiA continues to be very good averaging 26.7 bps across 34% of trades this past year. We cannot compare to Japan as its venues do not provide the data in their reports but Centre Point, ASXs anonymous mid-point order type, reported 22bps of PI for May on a record AU$6.1 billion (US$5.7 billion) which made up 8% of on-market trading. There looks like there is a lot of fat in the Australia markets that is being cut here too by both ASX and ChiA.
27.00
22.00 Jul 12 2013
Sep 20 2013
Nov 29 2013
Feb 7 2014
Apr 17 2014
Jun 27 2014
Source: Chi-X Australia website Figure: 10
ASX and Chi-X Australia Average Trade Size USD
ChiAs average trade size (Figure 10) seems to have found its long run average coming in just below their yearly average of US$2,674. ASXs average trade size has crept back up to US$3,800. Volatility, like most of Asia, is at a one-year low hitting 10.29 on the 26 June making options cheap and alpha generating trades difficult, though with the PI being realised this may not make a difference. Australia, it would appear, is a relatively illiquid market driven by pension trading rather than event-driven trading.
4,000 3,800 3,600 3,400 3,200 ASX
3,000
Chi-X Aus 2,800 2,600 2,400 2,200 2,000 2013-07
2013-09
2013-11
2014-01
2014-03
2014-05
Source: Thomson Reuters Equity Market Share Reporter
Figure: 11
Chi-X Australia Top Stocks by Market Share % Symbol DJS MTS TLS WRT AGO
Share % 47.14 30.1 26.84 26.62 24.91
Value A$ 2,479,428 3,742,403 18,146,410 13,937,854 2,659,967
Avg PI (bps) 15.59 22.58 11.79 18.3 51.67
In total 666 names were traded and 1,125 quoted on ChiA as reported in the week of 27 June with TLS, ANZ and WBC rounding out the top three by notional traded (Figure 11). The top five securities comprises 22.5% of overall value that week but this does not tell the whole story as off-market executions are not included. For example, on 13 June, the record trading day, BHP did AU$119 million (US$111.3 million). In fact, off-market trading was 260% larger than the continuous session that day. Going back to Centre Point, there were 66 blocks traded over AU$1 million (US$930,000) in May (June report not available at the time of writing) with WBC, NAB and BHP rounding out the top three which made 14.3% of total Centre Point Block trading. DJS was the largest block executed with a size of AU$5.9 million ($5.51 million). UBS was the number one broker executing AU$1.6 billion (US$1.49 billion). Merrill Lynch came in second with just under AU$1.3 billion (US$1.21 billion) and Morgan Stanley a close third at AU$1.26 billion (US$1.17 billion). Note: Values calculated for the fragmentation report do not include primary auction data and will vary from the values found in our Asia equity trading recap which does include auction data.
Chi-X Australia Top Stocks by Value Symbol TLS ANZ WBC FMG WRT
Value A$ 18,146,410 17,859,936 16,350,245 14,363,859 13,937,854
Share % 26.84 14.62 15.12 16.55 26.62
Avg PI (bps) 11.79 2.42 2.43 15.42 18.3
Source: Chi-X Australia Weekly Trading Report June 27, 2014
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FRAGMENTATION
FRAGMENTATION FOR ETFS IN
JAPAN AND AUSTRALIA
In this issue we focus on ETFs in Japan and Australia and how they trade across different venues. We identify the top ETFs by turnover and measure their liquidity fragmentation. Japan has seen a boost in levels of ETF trading over the last year, a likely consequence of beneficial governmental policies that have been implemented to boost the overall economy. Japan’s currency depreciation over the same period has contributed too. Amongst the top traded ETFs, NEXT FUNDS Nikkei 225 Leveraged Index ETF (1570) accounts for over half of the total trading value in Japan. The FFI level of 1.05 for May 2014 suggests that trading in this particular ETF took place almost entirely on one exchange - in this instance, 98% on Tokyo. The remaining 2% was traded across the two PTSs (SBI Japannext and Chi-X Japan). Although there have been a number of spikes over time (Chart 1), FFI values for Japan’s top ETFs remain fairly modest and sit just above
1.00 (Table 1). These values, however, are based on lit venues only so exclude ToSTNet 1 and 2. If we include these markets in the calculations, we see trading activity on ToSTNet-1 for almost all of the top ETFs (Chart 3). Turning to Australia, the average FFI is even lower than in Japan (Chart 2), with just two of the top 10 ETFs traded on both ASX and Chi-X Australia (Table 2). Although SPDR S&P/ASX 200 FUND is the only one to show any real fragmentation of liquidity, it’s interesting to note that this consistently reaches significant levels. In May 2014, 16% traded on Chi-X (Chart 4), but a weekly market share up to 30% has been recorded for that venue on a number of occasions over the past year. Last but not least, liquidity levels for the two countries’ winners remain high with Japan’s top ETF showing higher levels, with fewer fluctuations over time, than Australia’s SPDR S&P/ASX 200 (Charts 5 and 6).
Top 10 ETFs traded in Japan - May 2014 Rank
FIM
Description
Value (JPY mil)
FFI
1.
1570
NF TOPIX-1 N225 LEVERAGED
1,213,477
1.05
2.
1321
N225 FUND
168,386
1.06
3.
1306
NOMURA AM TOPIX
113,543
1.12
4.
1330
NIKKO AM NIKKO N225
101,509
1.07
5.
1568
SIMPLEX AM TOPIX BULL 2X
90,405
1.07
6.
1579
SIMPLEX AM N225 BULL 2X
86,567
1.04
7.
1320
DAIWA AM N225
62,172
1.16
8.
1571
NF TOPIX-1 N225 INVERSE INDEX
37,165
1.05
9.
1346
MITSUBISHI UFJ AM MAXIS N225
31,824
1.02
10.
1308
NIKKO AM TOPIX JPY
29,670
1.08
Source: Fidessa
Top 10 ETFs traded in Australia - May 2014 Rank
FIM
Description
Value (USD)
FFI
1.
STW.AX
SPDR S&P/ASX 200 FUND
180,556,657
1.39
2.
AAA.AX
BSHARES AUS HI INTEREST CASH
68,753,708
1.00
3.
IVV.AX
ISHARES S&P 500
65,140,825
1.00
4.
VAS.AX
VANGUARD AUS SHARES INDEX
41,215,836
1.00
5.
IOO.AX
ISHARES S&P GLOBAL 100
29,843,043
1.00
6.
IEU.AX
ISHARES S&P EUROPE 350
21,485,120
1.00
7.
USD.AX
BETASHARES U.S. DOLLAR
20,642,158
1.00
8.
IOZ.AX
ISHARES MSCI AUSTRALIA 200
13,757,296
1.00
9.
RDV.AX
RUSSELL HI DIV AUS SHARES
9,937,522
1.00
10.
IHD.AX
ISHARES S&P/ASX HI DIV
8,203,367
1.01
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FRAGMENTATION AVERAGE FFI FOR JAPAN’S Average FFI for TOP Japan'sETFS top ETFs
AVERAGE FFI FOR
AUSTRALIA’S TOP ETFS Average FFI for Australia's top ETFs
1.20
1.25
1.16
1.20
1.12
1.15
1.08
1.10
1.04
1.05
1.00 Aug 10
Jan 11
Jun 11
Nov 11 Apr 12
Sep 12
Feb 13
Jul 13
Dec 13 May 14
1.00 Aug 10
Feb 13
Jul 13
Dec 13 May 14
Chart 2
VALUE BREAKDOWN FOR Value breakdown for Australia's ETFs, May AUSTRALIA’S ETFS, MAY 14 '14
4% 2%
10% 3%
5% 2%
0% 1%
0% 2%
26%
2% 3%
5% 60% 40%
Sep 12
VALUE BREAKDOWN FOR
80%
97%
Nov 11 Apr 12
Chart 2
ASX
Tokyo SBI Japannext Chi-X Japan ToSTNet-1 1% 2%
Jun 11
Chart 1
ValueJAPAN’S breakdownETFS, for Japan's ETFs, MAY 14May '14 100%
Jan 11
93%
85%
92%
96%
98%
32%
32%
80%
0%
2%
60%
0.19%
15.82%
100% 100% 100% 100% 100% 100% 100% 100%
95% 69%
Chi-X Australia
100%
40%
68%
66%
20%
84%
100%
20% 0%
0%
Chart 3
Chart 3
Chart 4
LIQUIDITY LEVELS: NF NIKKEI 225 LEVERAGED ETF
LIQUIDITY LEVELS: SPDR S&P/ASX 200
Chart 5
Chart 6
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EQUITIES
RECAP MAY-JUNE 2014
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EQUITIES
Asia Exchange Trade Count June 2014 Total 320,738,147
* Change data are from May 2014
Source: Thomson Reuters Equity Market Share Reporter
Asia Exchange Average Trade Size June 2014 (USD)
* Change data are from May 2014 WWW.ASIAETRADING.COM
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EQUITIES
Liquidity 30.000
Spread (bps)
25.000 20.000 15.000 10.000 5.000 0.000
MSCI Asia Pacific Ex JP
Hang Seng
TaiWan TAIEX
NSE S&P Nifty
S&P/ASX 200
Kospi 200
Straits Time
Market Impact 35.000 30.000
Impact (bps)
25.000 20.000 15.000 10.000 5.000 0.000
Hang Seng
NSE S&P Nifty
Kospi 200
Parent Order Size (%ADV)
Value Share Trading June 2014 (USD)
Source: Thomson Reuters Equity Market Share Reporter
Total 1,613,377,093,942 (9.43%)
* Date in brackets are change from May 2014
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ETF TOP 50
PRODUCT NAME
MANAGEMENT COMPANY
AUM (US$)
COUNTRY
MANAGEMENET FEE
STOCK CODE
SPDR S&P500 Trust
State Street
159,971,497,809
Japan
0.09%
1557
SPDR Gold Shares
World Gold Trust Services, LLC
31,520,672,274
Japan
0.40%
1326
Nikkei 225
Nomura Asset Management
18,619,900,015
Japan
0.24%
1321
TOPIX
Nomura Asset Management
15,966,648,709
Japan
0.11%
1306
Daiwa -TOPIX
Daiwa Asset Management
11,019,018,067
Japan
0.11%
1305
Listed Index Fund 225
Nikko Asset Management
9,309,802,631
Japan
0.225%
1330
Daiwa -Nikkei 225
Daiwa Asset Management
8,059,242,980
Japan
0.16%
1320
iShares FTSE A50 China Index
BlackRock
7,148,908,134
Hong Kong
0.99%
2823
0.10%
2800
Tracker Fund of Hong Kong
SSGA Asia
7,110,879,237
Hong Kong
Listed Index Fund TOPIX
Nikko Asset Management
7,042,943,426
Japan
0.088%
1308
Hang Seng Index
Hang Seng Investment Management
4,982,400,295
Hong Kong
0.05%
2833
MAXIS NIKKEI225
Mitsubishi UFJ Asset Management
4,741,558,786
Japan
0.17%
1346
S Physical Gold
ETFS Management Company
4,629,961,294
Japan
0.39%
1672
SAMSUNG KODEX 200 SECURITIES
Samsung Asset Management
4,284,199,915
Japan
0.26%
1313
KODEX 200
Samsung Asset Management
4,273,401,088
Korea
0.26%
A069500
CSOP FTSE China A50
CSOP Asset Management
3,577,863,992
Hong Kong
0.99%
2822
ABF PAN ASIA BOND INDEX FUND
SSGA Singapore
3,038,012,438
Japan
0.19%
1349
ABF Pan Asia Bond Index Fund
SSGA Singapore
3,032,955,000
Hong Kong
0.18%
2821
E FUND SZSE100 INDEX FUND
E Fund Management
2,972,483,038
China SZSE
0.50%
159901
Hang Seng H-Share Index
Hang Seng Investment Management
2,468,539,976
Hong Kong
0.55%
2828
NEXT FUNDS Nikkei 225 Leveraged Index
Nomura Asset Management
2,386,411,143
Japan
0.80%
1570
SPDR S&P/ASX 200
SSGA
2,186,387,065
Australia
0.29%
STW
db x-trackers MSCI USA INDEX UCITS
DB Asset & Wealth Management
1,930,341,000
Hong Kong
0.30%
3020
MAXIS TOPIX
Mitsubishi UFJ Asset Management
1,890,046,586
Japan
0.078%
Harvest CSI 300 Index
Harvest Fund
1,750,532,353
China SZSE
0.50%
159919
TIGER200
Mirae Asset
1,689,368,030
Korea
0.09%
A102110
KODEX LEVERAGE
Samsung Asset Management
1,559,348,862
Korea
0.64%
A122630 A153130
1348
KODEX KRW CASH
Samsung Asset Management
1,119,359,298
Korea
0.15%
ChinaAMC CSI 300 Index
China Asset Management
1,084,547,311
Hong Kong
0.70%
3188
0.40%
O87
SPDR速GOLD SHARES
SSGA
1,048,000,000
Singapore
iShares Core S&P 500
BlackRock
1,041,638,075
Australia
0.07%
IVV
NEXT FUNDS REIT INDEX
Nomura Asset Management
956,857,638
Japan
0.32%
1343
iShares Nikkei225
BlackRock
938,337,305
Japan
0.17%
1329
W.I.S.E - CSI 300 China Tracker
BOCI-Prudential Asset Management
892,037,836
Hong Kong
0.99%
2827
KINDEX200
KOREA INVESTMENT TR
854,327,756
Korea
0.15%
A105190
S Physical Silver
ETFS Management Company
836,177,271
Japan
0.49%
1673
Samsung KODEX S
Samsung Asset Management
789,148,905
Japan
0.40%
1584
KODEX Samsung
Samsung Asset Management
781,485,692
Korea
0.40%
A102780
ISHARES MSCI INDIA
BlackRock
719,000,000
Singapore
0.99%
POWER K200
KAIM
668,600,074
Korea
0.145%
Vanguard Australian Shares Index
Vanguard
620,471,510
Australia
0.15%
VAS
iShares S&P Global 100
BlackRock
602,206,467
Australia
0.40%
IOO
KODEX INVERSE
Samsung Asset Management
579,309,802
Korea
0.64%
A114800
Listed Index Fund TOPIX Ex-Financials
Nikko Asset Management
564,238,814
Japan
0.088%
1586
Listed Index Fund J-REIT
Nikko Asset Management
557,427,616
Japan
0.30%
1345
S Physical Platinum
ETFS Management Company
531,983,597
Japan
0.49%
1674 A157450
QK9 A152870
TIGER MONEY MARKET
Mirae Asset
466,228,372
Korea
0.09%
S Physical Palladium
ETFS Management Company
452,335,680
Japan
0.49%
1675
0.18%
AAA
0.22%
1615
Betashares Australian High Interest Cash
RBC Investor Services
439,794,675
Australia
TOPIX Banks
Nomura Asset Management
431,774,284
Japan
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POST TRADE
BEHIND THE SCENE OF ETF CREATION By Lynn Strongin Dodds
Managing ETFs in Asia can be challenging as a result of inefficient technology and a fragmented market
E
xchange traded fund (ETFs) managers in Asia are seeking to overcome the disadvantages of local market inefficiency, by automating the creation and redemption (C&R) process and delivering cross-border products. However, despite being easy to trade, the mechanism behind ETFs is complex.
Marco Montanari
Head of passive asset management Asia Pacific at Deutsche Asset & Wealth Management, Hong Kong
“There is a so-called liquidity misconception in the ETF space in Asia,”
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To create an equity ETF, an asset manager gets a big fund to lend the stocks necessary to replicate an index. One or more large institutional trading firms – typically big brokers – must be appointed by the fund manager to buy and sell the shares or other securities that are underlying the ETF, then passes them to a custodian bank batched together into ‘units’ comprising a fixed number of that ETF’s stocks, typically tens or hundreds of thousands. The custodian bank holds them in trust and provides the ETF shares to the appointed brokers who sell them in the market.
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POST TRADE Although members of the public will typically just sell the shares of an ETF in order to redeem them for value, institutional investors can buy them in enough bulk to form ‘units’. These can be redeemed for the underlying stocks, which makes ETFs a good way for asset managers to access markets that can be otherwise hard to enter. However challenges exist. Any inefficiency in communication during the process can mean that a deadline is missed, with attendant costs depending on whether the process was for creation or redemption, related fees and opportunity costs. That is typically the dealing deadline for the exchange on which the ETF is listed, however market participants complain that risk averse custodian banks put in numerous safety precautions that restrict the window in which C&R can occur. “Missing a deadline reduces the time we have to accept orders and for people to transfer funds,” says one buy-side provider.
TRACKING CHINA For ETFs tracking Chinese A-shares, listed on the Shanghai or Shenzhen exchanges, creation and redemption is trickier. Qualified Foreign Institutional Investor (QFII) or Renminbi QFII (RQFII) status has to be attained by Chinese authorities to trade A-shares and that status comes with a strict quota on the number of stocks that can be owned, each quota according to the individual firm. That quota can interfere with the process of redemption, particularly if it does not run smoothly. “We run large RQFII ETFs and we see issues whenever a quota is reached,” said the head of Institutional Clients at a major Hong Kong-based asset management firm. “In Asia a lot of the communication with trustees is through fax and if you have a technical problem with the fax or an email gets missed then that may result in some of the dealers missing deadlines in the creation and redemption process.” Chinese ETFs are particularly popular with overseas investors who do not have access to A-shares via QFII investment, and therefore may be in a different time zone to the Hong Kong market, further complicating timing around both creation and redemption. CSOP Asset Management, a major provider of China A-share ETFs has looked at the way this is handled in the US and Europe, and has decided to push for greater automation in the C&R process. “This year we have started the development of an automation system for creation and redemption to as many market participants as possible,” said a spokesperson for the firm. “I think that people generally welcome it because they need more efficiency in creation and redemption.”
LOCAL CHALLENGERS Asian providers of ETFs have challenges in marketing as well as managing their products, lacking as they do the liquidity that exists in the more mature markets. “There is a so-called liquidity misconception in the ETF space in Asia,” says Marco Montanari, head of passive asset management Asia Pacific at Deutsche Asset & Wealth Management, Hong Kong. “Liquidity is often the highest priority for most investors when choosing an ETF which means that they chose the exchange with the largest volumes such as the US or Europe or Japan in the region. This makes it difficult for smaller Asian markets to create their own ETF product.” Deborah Fuhr, founding partner of independent research firm ETFGI agrees adding, “One of the challenges for Asian markets is that locally domiciled products cannot be cross-listed in Asia which means for example, Hong Kong and Singapore ETFS are only listed on their respective markets. As a result, trading and creations and redemptions are mainly done in the US and Europe which still has siloed settlement systems. For example, if the ETFS is listed on the London Stock Exchange, it is redeemed through LCH.Clearnet or if it is on the Deutsche Börse, it would be Clearstream.” The concept of ‘passporting’ in Europe means that firms are beginning to look at trading anywhere and settling in one location. The ability to create of US-listed ETFs on Asian exchanges which could trade across the region or a European UCITS style passport framework would be a real turning point in Asia. Currently there are three fund passport initiatives on the table with the Association of Southeast Asian Nations (Asean) Fund Passport (ARFP) offering the most visibility so far in terms of eligibility criteria and operating rules. The Asia Region Funds Passport (ARFP) which includes Singapore, Australia, Korea, New Zealand, the Philippines and Thailand is still in the consultation phase and the goal is to start the programme in 2016. Meanwhile, Hong Kong and China are inching closer with their mutual recognition agreement which is expected to be unveiled this summer. Few details have been disclosed but the aim is to allow mutual funds domiciled in Hong Kong to be sold into China and vice versa, expanding on the existing crossborder investment schemes. At the moment, we have silos of local providers as well as global firms based in the US and Europe,” says Fuhr. “There is no point in cross-listing most European and US products in Asia as the trading happens primarily in the home market. I think these three initiatives to create an Asian passport are positive but there also needs to be other regulations along the lines of the UK retail distribution review if you want to create a pan-Asian marketplace.”
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Nauroz
21-Aug Philippines
Ninoy Aquino Day
25-Aug Philippines
National Heroes Day holiday
29-Aug India
Ganesh Chaturthi
1-Sep
Malaysia
Malaysia’s National Day observed
2-Sep
Vietnam
Independence Day
8-Sep
China
Mid-Autumn Festival
8-Sep
South Korea
Mid-Autumn Festival Day 2
8-Sep
Taiwan
Mid-Autumn Festival
9-Sep
Hong Kong
Day after Mid-Autumn Festival
9-Sep
South Korea
Mid-Autumn Festival Day 3
10-Sep
South Korea
Korean Thanksgiving Day
15-Sep
Japan
Respect for the Aged Day
16-Sep
Malaysia
Malaysia Day
23-Sep
Japan
Autumn Equinox
23-Sep
Pakistan
September equinox WWW.ASIAETRADING.COM
DIRECTORY
BofA Merrill Lynch, recently voted Asia’s Best Brokerage and Asia’s Best Sales in the 2012 Institutional Investor All-Asia surveys, offers a full suite of premier multi-asset execution services globally backed by the bank’s global resources and expertise. The Global Execution Services (GES) team is made up of experienced market experts who partner with clients to ensure all aspects of best execution. Key services include comprehensive execution consulting, state of art algorithmic trading technologies, quantitative analytics and research. GES a key business partner to BofAML’s institutional clients. Email: AsiaPacAlgo@baml.com Bloomberg: MSG MLAPDSA<GO> Hong Kong +852 2161 7550 Mumbai +91 22 6632 8718 Singapore +65 6678 0205 Sydney +61 2 9226 5108 Tokyo +81 3 6225 8398
Fidessa is a global business with scale, resilience, ambition and expertise. We’ve delivered around 30% compound growth since our stock market listing in 1997 and we’re recognised as the thought leader in our space. We set the benchmark with our unrivalled set of mission-critical products and services and, uniquely, serve both the buy-side and sell-side communities. Ongoing investment in our leading-edge, integrated solutions ensures Fidessa remains the industry’s number one choice. Tel : +(852) 2500 9500 ap.info@fidessa.com www.Fidessa.com @fidessa
Founded in 1996, FlexTrade Systems Inc. is the industry pioneer in broker-neutral, execution and order management trading systems for equities, foreign exchange and listed derivatives. With offices in Asia, Europe and North America, FlexTrade has a worldwide client base spanning more than 175 buy- and sell-side firms, including many of the largest investment banks, hedge funds, asset managers, commodity trading advisors and institutional brokers. For more information, visit FlexTrade Systems at www.flextrade.com or follow news of the company on Twitter at www.twitter.com/flextrade or LinkedIn at http://www. linkedin.com/company/flextrade +65 6829 2569 sales_asia@flextrade.com.
SunGard’s solutions for capital markets help banks, broker/dealers, futures commission merchants and other financial institutions improve the efficiency, transparency and control of their trading and processing. From market connectivity, trade execution and securities financing to accounting, data management and tax reporting, our solutions provide cross-asset support for the entire trade lifecycle. We help our customers increase efficiency, make more informed decisions, improve their use of capital and manage risk more effectively. Asia Contact Info: Hong Kong: +852 3719 0800 Singapore: +65 6308 8000 Email: cm.asia@sungard.com Web: www.sungard.com/capitalmarkets Twitter ID: @SunGardCM
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July 2014
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Asia Etrader
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the global forum for derivatives markets 23-25 september 2014
I
intercontinental hotel
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geneva, switzerland
FIA and FIA Europe join the Swiss Futures and Options Association in co-hosting B端rgenstock 2014: The Global Forum for Derivatives Markets in Geneva. Register online and keep track of programming, events and speakers at www.burgenstock.org.