CLSA firm lists HK's first 'Chimerica' ETF

Hong Kong’s first ETF tracking US-listed Chinese firms will start trading today on the city’s stock exchange with about HK$300 million ($38.7 million) in AUM at launch.

The new physically-backed fund, which is predominantly composed of internet stocks, comes months before US-listed Chinese become eligible for inclusion in a key global equity index, which could lead to a surge in demand.

However, it comes after a series of ETF delistings from Hong Kong’s bourse in recent months, which were blamed on low fund assets.

The Xie Shares FTSE Chimerica exchange-traded fund is asset manager EIP’s first ETF launch since CLSA acquired a 49% stake in the company’s exchange-traded fund business last August. At that time, AsianInvestor reported CLSA and EIP’s plans to launch a range of thematic ETFs by end 2014.

The launch comes three months after index provider MSCI announced that US-listed companies will become eligible for inclusion in the MSCI China index. The November 2015 implementation of that change may see internet stocks’ weighting in the index rise to more than 20%, from around 12% today. Chinese internet companies account for 83% of EIP’s new ETF.

That may spur a pick-up in interest in US-listed China shares which have been “out of sight, out of mind to an extent,” EIP’s chief executive Tobias Bland told AsianInvestor. He observed that the FTSE N-share – or Chimerica – index has been an underperformer, lagging behind the A50, CSI300, Hang Seng China Enterprises and Hang Seng Indices (in that order) since last July.

The launch also follows a series of ETF delistings from Hong Kong’s stock exchange. China Merchants Securities (CMS) Asset Management’s CMS CSI Overseas Mainland Enterprises ETF delisted on March 23 this year, for example. Da Cheng’s CSI HK Private-owned Mainland Enterprises and CSI HK State-owned Mainland Enterprises trackers were delisted on November 12 last year.

Both CMS and Da Cheng cited low fund assets as the reason for the delisting of those ETFs.

EIP’s new ETF has already gathered more than ten times the level of assets which those funds had. “Two things about ETFs are pretty consistent – you need to be first to market with any product and you need to build critical mass,” observed Bland. “We have aspirations to be the first in a lot of asset classes.”

CLSA’s parent company – Citic Securities International – accounted for around 60% of sales during the April 10-21 pre-listing fundraising period, highlighting Citic’s importance in helping EIP’s ETFs build critical mass. EIP’s HK$300 million AUM at launch is already more than double the AUM of any of the firm’s seven existing ETFs, which were all launched in February 2012.

All of those seven funds are synthetic ETFs. In contrast, EIP is launching its first physically-backed ETF. Bland said that that the need to set up a new trust structure for physical ETFs had contributed to the length of time it took to launch the ETF. The fund was in the planning stage at the time of the CLSA acquisition in August last year.

“The recent move in China synthetic ETFs is a bit discouraging,” said Bland, pointing to the fact that large Hong Kong-listed synthetic ETFs have started trading at a discount to their net asset value (NAV) while physical ETFs (which track the same index) have been trading at parity in the most recent market move.

Antoine de Saint Vaulry, Commerzbank’s head of ETF and flow trading Asia pointed out that the discount/premium to NAV of China ETFs is linked to the availability of RQFII/QFII quota to trade mainland-listed shares. “For ETFs tracking US-listed stocks it is much easier to realise arbitrage between synthetic and physical ETFs,” de Saint Vaulry said.

“It is interesting to see more of those type of ETFs,” he added, referring to ETFs listed on Asian exchanges tracking stocks which trade on exchanges outside of Asia.

Bland said that ETFs “don’t tend to travel well. I think that your home market is your best market.”

De Saint Vaulry agreed: “We see queries from European investors on Hong Kong-listed ETFs with China underlyings but that is slowly changing because more issuers are issuing product tracking these underlyings in Europe,” which are more appealing to investors. The same trend is playing out in Asia. “It was a one-way street – it’s starting to be a two-way street but it’s still not on par,” he added.

Bland said that “our remit with what Citic wants us to do over time all depends on southbound flow, mutual recognition and ETFs being included in Stock Connect. All these different things that hopefully will transpire over the next couple of years.”