Vanguard Signals Asian Ambitions

May 08, 2013

U.S. mutual's arrival in Hong Kong may shake up Asia's historically uncompetitive tracker fund market.


[This article originally appeared on our sister site,]


The idea that ETFs should be a low-cost vehicle has not yet taken hold in most of Asia, with fees on many local ETFs being closer to those that US investors might expect from an actively managed fund. So the news that arch-discounter Vanguard is moving into the Hong Kong market could turn out to be a very significant development for the industry.

The firm has just received regulatory approval for its first Hong Kong-domiciled ETF, a regional Asia ex-Japan tracker that will launch in the near future. The fund will track the FTSE Asia ex-Japan index, continuing Vanguard's recent shift away from MSCI to FTSE benchmarks, and carry a total expense ratio (TER) of 0.38 percent a year.

While there is no directly comparable ETF to this in Hong Kong at present, it is significantly cheaper than most similar products. For example, two physically replicated regional ETFs offered by iShares have TERs of 0.65 percent.

Whether these lower costs will be enough for Vanguard to gain momentum isn't certain. It remains difficult for new ETF providers to gain a foothold in markets such as Hong Kong, as Lyxor's withdrawal in 2011 showed.

Activity tends to be concentrated in a handful of successful products, while many local institutions prefer to trade in more liquid US-listed ETFs. Meanwhile, retail investors tend either to invest directly or to buy relatively expensive active funds through channels such banks and financial advisers.

However, Vanguard enjoys considerable global economies of scale and has arguably a more focused approach to attracting retail investors than any other provider, with its relentless reiteration of the importance of costs. If Hong Kong ETFs are to move beyond a dependence on a few large China-related products, Vanguard's arrival could be just what the industry needs.

China Southern Sees Launch Hiccup

In April there were also five new listings in Hong Kong, all cross-listings of existing funds in Deutsche Bank's db x-trackers range. The funds are Asian equity funds based on MSCI indices and include country trackers for Bangladesh, Singapore, Pakistan and the Philippines, as well as an MSCI high dividend index for the Asia ex-Japan region.

In mainland China, China Southern had a fairly successful start with its new Shanghai-listed CSI 300 tracker, ending the month with around RMB3.7 billion (US$600 million) in assets. This lags behind the combined US$11 billion held in CSI 300 ETFs launched by Harvest, Huatai-Pinebridge and China AMC over the past nine months, but beats the US$200 million raised by E Fund for its competitor fund in March.

However, the launch did not go entirely smoothly, after China Southern allowed an institutional investor to make an in specie subscription to the ETF, using shares of a constituent of the CSI 300 that were suspended from trading at the time of fundraising. The stock then dropped sharply when trading resumed, resulting in increased tracking difference between the ETF and the CSI 300 index. After initial investors in the ETF complained to the regulator, China Southern was obliged to pay RMB48 million (US$6 million) in compensation to those affected.

In addition, Yinhua launched a money market ETF, following on from the arrival of China's first such product in January. That fund—from Fortune SG—has performed well, holding almost RMB6 billion (US$1 billion) in assets, while Yinhua's offering pulled in a healthy RMB2.2 billion (US$360 million) in its first month. There appears to be plenty of scope for other providers to try their luck in this niche.

Volatility Index Trackers Multiply In Tokyo

Japan's Nomura continued its recent run of ETN launches on the Tokyo Stock Exchange, adding another five index-tracking notes in April to the five already launched this year. Four of these are commodity-based products, consisting of inverse and leveraged trackers for gold and crude oil. The underlying benchmark in each case is the relevant Nikkei-TOCOM index of front-month futures contracts for that commodity.

The fifth product, the NEXT NOTES Nikkei 225 VI Futures Index ETN, tracks an index of Nikkei 225 volatility futures listed on the Osaka Securities Exchange. This is the first ETP based on an Asian volatility index, although not the first volatility ETP in the region: Barclays has previously listed ETNs in Tokyo based on the S&P500 index's volatility.

Volatility futures are a new product in the region, with only Osaka and the Stock Exchange of Hong Kong listing such contracts so far, although the Australia Securities Exchange hopes to join them later this year. Liquidity remains relatively light, meaning that most participants have preferred to use more liquid US-linked products, such as the Chicago Board Options Exchange VIX futures and options.



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