Date
19 November 2017
Ray Chan says SSGA has no time table for smart beta ETFs until it sees a significant increase in trading volume. Photo: EJ Insight
Ray Chan says SSGA has no time table for smart beta ETFs until it sees a significant increase in trading volume. Photo: EJ Insight

Sector-specific ETFs likely if MSCI includes A shares

A number of Hong Kong-listed exchange traded funds (ETFs) that track specific sectors in the A-share market will be on the horizon if A shares are included in the MSCI Emerging Markets Index, State Street Global Advisors (SSGA) said.

Foreign investors have a better chance of investing in A shares if it happens, according to Ray Chan, SSGA vice president and head of ETF business development in Asia ex-Japan.

“This will naturally lead to the emergence of ETFs that focus on different sectors in the A-share market, or ETFs that have different styles,” he said.

Such a trend is very likely, especially when the Shanghai and Shenzhen stock markets are now the second largest in the world by market capitalization.

SSGA introduced the first US-listed ETF linked to the Standard & Poor 500 in 1993 and went to offer a complete series of ETFs that focus on various sectors, he said.

“We believe that based on this experience… there will be a similar development cycle of the product in the Asian and Chinese markets,” he said.

The MSCI Emerging Markets Index, launched in 1988, reviews its constituents each June based on economic development, market size, liquidity and accessibility to decide if a country can be included in the index.

It covers more than 800 securities across 23 markets, representing about 11 percent of world market capitalization.

The inclusion of A shares is expected to attract more global investors and bolster the renminbi’s internationalization.

Also, it may lead to a greater number of smart beta funds, which differ from traditional market capitalisation-based tracking funds by selecting stocks in an index using specific valuation or fundamentals, Chan said.

“As the products become more diversified and investors are more sophisticated in the use of ETFs… the development cycle of this product will soon come. Many issuers of A-share ETFs are considering the direction of the product,” he said.

SSGA has no time table for smart beta ETFs until it sees a significant increase in trading volume.

SSGA manages Tracker Fund of Hong Kong (TraHK, 02800.HK) which tracks the Hang Seng Index. It is watching developments on the proposed launch of core funds under the Mandatory Provident Fund (MPF) scheme.

The government has finished a public consultation on the proposal aimed at cutting management fees and producing higher investment returns.

The Mandatory Provident Fund Authority (MPFA) is proposing a 0.75 percent cap on fees for the core funds.

“If the MPF invests in a passive management fund like the ETF… it can address the issue of fees,” Chan said, adding that TraHK outperforms many active management funds over a period of time.

The average fund expense ratio of all equity MPF funds was 1.67 percent as of the end February 2015 while that of TraHK was 0.1 percent, according to the MPFA.

New legislation will require each provider to run two core funds with preset investment strategies where the level of risk depends on the age of the fund holder.

The authority expects to submit a draft proposal to the legislature by the end of this year and introduce the new rules by the end of next year. 

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JH/JP/RA

EJ Insight reporter

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