24 October 2016
Investing in a diverse range of ETFs can help individuals gain shelter from market risks. Photo: Xinhua
Investing in a diverse range of ETFs can help individuals gain shelter from market risks. Photo: Xinhua

ETFs can help diversify the risks

As China seeks a structural shift in its economy by focusing more on domestic consumption and reducing the reliance on exports, the stock markets could see further gyrations in 2016.

Old economy firms will come under pressure while technology and service sector plays will find favor.

As China enters the new normal, the Hong Kong market is also likely to see huge swings, with the benchmark index possibly moving 10-15 percent on either side.

There is a possibility that the A-share market will achieve a breakthrough this year, though the gains will come with higher volatility compared to Hong Kong.

Given the uncertainties, investors should consider various exchange-traded funds (ETFs) as they can help diversify the risks.

I will review the performance of 14 new ETFs in Hong Kong in 2015. The list includes 11 stock ETFs, two futures ETFs and one bond ETF.

Most of the ETFs are associated with China or Greater China concepts. Among them, six are ETFs that invest in A-shares through the Renminbi Qualified Financial Institutional Investor (RQFII) quota.

Among the 14 ETFs, six reported net capital inflow, as of December 22. The ETF that invests in Shenzhen’s growth enterprise market saw the largest increase in assets under management. Its size expanded ten-fold during the year, reaching 370 million yuan by end-December.

Two ETFs — one that tracks A-share value stocks and the other that tracks New York-listed China firms (the so-called N-shares) — saw their size expand 1.5-fold during the same period.

Although it’s hard to directly compare their performance, the ETF which tracks N-shares has delivered the best performance. As of end-December, the fund — which was launched in April last year, was up 7 percent in asset value.

Meanwhile, the value of an ETF which tracks CSI Smallcap 500 index was down 25.3 percent by the end of 2015 since its launch in May.

It is worth noting that four of the 14 ETFs are so-called Smart Beta ETFs. The category yielded good results last year.

One A-share focused Smart Beta ETF outperformed the A50 ETF by 2.5 percent by the year end, while another that invests in Asian income stocks outperformed the traditional Asia-ex Japan stock ETFs by 2.9 percent, in terms of asset value.

In volume perspective, China GEM board ETF, China A-share ETF and Value A-share ETF are the top three. The three ETFs ranked 13st, 21st, and 22nd among a total 161 ETFs in Hong Kong. It is a clear indication of the welcome they received from investors.

The number of newly listed ETFs in 2015 was slightly higher than that in 2014. But due to regulatory restrictions, ETFs in Hong Kong market are not as innovative or unique as those in the United States and Europe, and even those in some Asia Pacific markets.

I hope the ETF market can provide investors more diversified products and help the city catch up with global peers in terms of product development.

This article appeared in the Hong Kong Economic Journal on Jan. 5.

Translation by Myssie You

[Chinese version 中文版]

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Associate Director at Value Partners Limited

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