CSOP debuts L&I ETFs, expands sales coverage

CSOP Asset Management will debut its first leveraged and inverse (L&I) exchange-traded funds in Hong Kong today – the first such products to track Indian stocks – and plans to add an institutional salesperson to cover Australia and Southeast Asia.

The Hong Kong-based fund house set up L&I products tracking India’s NSE Nifty 50 Index, namely Nifty 50 Daily (2x) Leveraged and Nifty 50 Daily (-1x) Inverse ETFs, after receiving regulatory approval on 14 July. It comes after Korea’s Samsung Asset Management listed the first two batches of L&I ETFs tracking Korean and Japanese equities in Hong Kong last month.

Melody He, head of ETF and index solutions at CSOP, said the firm was adding an institutional salesperson in Hong Kong to cover Australia and Southeast Asia. The individual will take up the newly created post in two weeks. 

As for why it opted to start with Indian equities, He said CSOP intended to fill product gaps in the region. There are already numerous L&I products tracking Japan and Korea equities, mainly listed in their home market, she added. Taiwan's Fubon Asset Management in March listed a batch of L&I funds tracking the Nifty 50 in Tapei in March.

Another consideration is that CSOP wants to track markets that are easily tradable in the Asia time zone. “Many investors use L&I funds as short-term trading instruments, so it would be rather difficult to offer US- and Europe-linked funds which are cross-time-zone products,” He said.

As Hong Kong’s Securities and Futures Commission (SFC) further relaxes the rules, CSOP plans to launch other L&I products tracking commodities and Hong Kong equities. 

The SFC does not yet allow L&I products referencing Hong Kong and China stocks. Hong Kong equities will only be considered for review from December, six months after the first products were launched. No formal indication has been given about the time frame for mainland indices.

Industry observers do not expect L&I products to really take off in Hong Kong until the regulator approves products linked to local shares, as has been the experience in other markets. In Taiwan, L&I ETFs first listed in November 2014, and the three biggest by assets are those tracking Taiwan and China equities: the Yuanta Daily Taiwan 50 Bear (-1x) ETF ($1.67 billion in AUM), Fubon SSE180 Leveraged (2x) Index ETF ($926 million) and Yuanta Daily CSI 300 Bull (2x) ETF ($653 million).

Hong Kong-listed L&I ETFs offer the benefit of trading in Hong Kong dollars, which are pegged to the US dollar, noted He. International institutional investors might not buy L&I products listed in, for example, Korea or Taiwan because of currency concerns, she said.

Retail investors are likely to be the main users of L&I products in Hong Kong, as they offer leverage with greater transparency and simplicity than listed equity derivatives, noted He. Hong Kong retail investors have appetite for leveraged products, she said, but warrants and callable bull/bear contracts (CBBCs), for instance, require an understanding of implied volatility and time value.  

Fubon AM said institutional investors were the main users of its L&I ETFs, without giving a breakdown figure. To be eligible for such products, investors must have traded stock warrants, futures or options more than 10 times in the previous 12 months. 

Meanwhile, some fund houses – with BlackRock’s iShares a notable example – do not plan to launch L&I ETFs. Both regulators and wealth managers have voiced concerns about these products, stressing the importance of investor education on the potential for big losses. 

The SFC’s caution in Hong Kong is one reason it took a relatively long time to approve them and why it is not initially allowing China- and Hong Kong-focused L&I ETFs.