Asset managers have started selling active exchange-traded funds (ETFs) in Hong Kong, led by the asset management unit of China International Capital Corporation (CICC), which debuted on Tuesday a US$120 million money market fund listed on the city's stock exchange.
Unlike a traditional passive ETF, which replicates the performance of the index, an active managed ETF allows the fund manager discretion to pick and choose a portfolio of securities.
These ETFs can be bought and sold just like stocks.
The launch of "ICBC CICC USD Money Market ETF" follows amendments made by the Securities and Futures Commission (SFC) on the city's "Code on unit trusts and mutual funds" in December, which paved the way for the introduction of active ETFs. Hong Kong is one of the few markets in Asia, after Australia and South Korea, to allow active ETFs.
The ETF will invest in US dollar short-term deposits and money market investments issued by governments and other organisations.
Lin Ning, managing director of CICC Hong Kong Asset Management, said using an ETF format opens an additional channel for retail investors to access money market funds through the city's bourse.
"In Hong Kong, we are seeing a lot of demand for US dollar cash management products that can cater to both retail investors and institutional investors," said Lin.
ICBC Asset Management acts as the investment adviser to the fund.
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To promote more retail interest, Lin said the fund would explore online distribution channels, such as the newly licensed virtual banks which are expected to become operational later this year. The Hong Kong Monetary Authority has so far awarded eight permits for virtual banks.
The ETF seeks to achieve a return in line with prevailing money market rates and has an annual management fee of 0.245 per cent. The ETF trades under the stock tickers 9011 and 3011, reflecting the US dollar and Hong Kong dollar counters respectively.
The security ended Wednesday trade at US$1,000.45, down slightly from Tuesday's close at US$1,000.50.
"There is a risk that investors may not recoup the (principal) … or may lose a substantial part or all of their initial investment," the product prospectus states.
The backers of the ETF said the risk profile of the product was low, with "primary considerations of both capital preservation and liquidity". I
Brown Brothers Harriman & Co, which is the custodian and administrator of the ETF, offers same day settlement for purchase and redemption, which it claims to be a first in Hong Kong.
During last week's initial offer period, the active ETF attracted US$120 million from institutional investors.
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Active ETFs account for 2 per cent of the US$3.5 trillion in listed ETF assets in the US, according to ETF.com. Active ETFs have been growing in popularity as net asset inflows into the funds has rising 32 per cent in the past year, or five times the rate of growth into passive ETFs.
Philippe El-Asmar, head of Asia Beta Strategies at JPMorgan Asset Management, said about half of the 51 ETFs that JPMorgan Asset Management manages globally are active ETFs. He added that in terms of ETFs, the priority of the firm's strategy in Asia is to promote active management.
The difference between an ETF and an open-ended mutual fund lies mainly in the additional liquidity provided through an exchange listing.
"Today in mutual funds, the only liquidity investors have is directly transacting with the fund manager, but in an active ETF you can buy or sell on the exchange via market makers, so they have additional liquidity," said El-Asmar.
Rather than launching ETFs for listing in Asia, El-Asmar said JPMorgan is seeking to market its US and European-listed ETFs to Asian investors.
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