Yuanta to launch leveraged, inverse A-share ETFs

Taiwan is expanding its leveraged/inverse ETF offerings with the upcoming launch of Yuanta’s new funds tracking China’s CSI300 index.

The new exchange-traded funds, which will start fundraising next week and be listed in May, will be the island’s third such product which provides heightened returns (or losses) when markets fall.

But market observers have expressed concern over retail investors’ ability to understand such risky alternative products, which are not available for sale in many major markets, including Hong Kong.

Yuanta Securities Investment Trust Company (SITC), Taiwan’s biggest ETF manager, will raise money for two funds - the Yuanta Daily CSI300 Bull 2x ETF and the Yuanta Daily CSI300 Bear 1x ETF - between April 27-30. Both funds are expected to be listed on the Taiwan Stock Exchange on May 18.

Although the funds will track the CSI300, they will initially invest in China FTSE A50 index futures because CSI300 index futures are currently unavailable in offshore markets. However, the firm plans to switch to investments in the onshore CSI300 index futures in Shanghai once it receives additional qualified foreign institutional investor (QFII) quota from China’s State Administration of Foreign Exchange.

Taiwan’s Financial Supervisory Commission (FSC) wants to boost equity market trading activities because the island’s secondary market turnover, margin trading and index volatility have been low for a long time. Bourse authorities have placed their hopes on alternative ETFs such as leveraged/inverse and commodities funds gaining market traction as they have done in Korea.

Taiwan launched its first leveraged and inverse ETFs in October last year, joining the likes of Korea, Japan and Singapore. Yuanta SITC was the first firm to launch leveraged/inverse funds, which tracked the Taiwan 50 index, and was followed by Fubon SITC bringing to the market leveraged/inverse funds tracking China’s SSE180 index in November last year. These four ETFs accounted for 37% of the total daily turnover among Taiwan’s 28 ETFs at the end of 2014, according to Bloomberg.

In total, there are 15 leveraged/inverse ETFs listed in Korea, one listed in Singapore and four listed in Taiwan, according to London-based research firm ETFGI. However, only Taiwan hosts alternative strategy funds which track China A shares. In Hong Kong, the Securities and Futures Commission has a restrictive stance on such products, as reported.

Even though leveraged/inverse ETFs are increasingly popular in Taiwan, market observers have stressed that such products should be seen as primarily for active traders rather than unsophisticated investors.

Regulators around the world have generally been cautious about allowing the listing of leveraged/inverse ETFs. Deborah Fuhr, managing partner of ETFGI, said the caution stemmed from 2009 statements released by the Securities and Exchange Commission and the Financial Industry Regulatory Authority in the US, which said that leveraged and inverse ETFs were not products that should be offered to retail investors.

“Leveraged/inverse ETFs are more suitable for active traders who understand how the product works as a short-term trading and speculation tool, because such products are more complicated in their structure compared to traditional ETFs,” said Jackie Choy, ETF strategist at investment consultancy Morningstar. Choy pointed out that “active traders” are not necessarily institutional investors, but retail investors needed to be sophisticated enough to understand the products.

Frank Lin, manager of international business at Yuanta’s index and quantitative investment division, said most trading of the firm’s leveraged/inverse Taiwan 50 ETFs were retail investors, particular on the Bull 2x product. “Some institutional investors may not able to buy the Bull 2x product because of their internal risk control,” he said.

In Taiwan’s case, not all investors are allowed to trade such leveraged/inverse funds - eligible investors must have traded derivatives such as stock warrants, futures or options more than 10 times over the past 12 months.