World’s largest gold ETF cleared for HK pensioners

State Street Global Advisors (SSgA) has received regulatory approval to allow Hong Kong MPF scheme providers to invest in its gold exchange-traded fund, coinciding with a tumble in bullion prices.

Workers contributing to the city’s Mandatory Provident Fund (MPF) can now gain exposure to the world’s largest gold bullion-backed ETF (and second largest ETF globally), which had $72 billion in AUM as at December.

Providers are now able to invest up to 10% of their MPF allocations into commodities, such as SPDR Gold Shares, which was launched in 2004 by World Gold Trust Services and State Street. The trust holds 100% allocated gold at the end of each day in a vault based in London.

Frank Henze, SSgA’s head of exchange-traded funds for Asia-Pacific, says he sees increased need for investors to diversify in an environment of macroeconomic risks to counter inflation, currency volatility and tail-risk events.

While he says that it is still yet to sell its gold ETF to MPF scheme providers having only just received regulatory approval, it will cast its net wide in terms of target market.

However, the announcement comes as gold spot prices have dropped 11% from an October peak, trrading at $1,598 per troy ounce yesterday, as investors embrace riskier assets such as equities.

Last week, Reuters reported that the ETF bullion holdings had dropped by 20.77 tonnes in a day, the largest daily outflow since August 2011.

Henze says “short-term fluctuations always have an impact [on inflows to its gold ETF]. There is always an element who want to take advantage of short-term opportunities.”

But he adds that MPF investment is all about growing assets for retirement, and that is something investors need to keep in mind.

Separately, at the start of this week Invesco launched a Hong Kong-denominated dim-sum bond fund that it is also targeting for its MPF platform.

The launch reflects its bullish view on the RMB bond market, in particular the upside potential of the currency, which has appreciated nearly 25% against the US dollar from July 2005 to mid-January.

Frankie Tai, associate director for fixed-income believes there will be a further 3-5% appreciation this year, with currency demand rising on the back of economic strengthening.

China saw 7.9% GDP growth in the fourth quarter from a year earlier, according to China's National Bureau of Statistics.

But Tai concedes there is risk: “Although I am positive on RMB appreciation, it is definitely not a one-way bet, and we have seen some volatility.”

Year-to-date, the renminbi has only appreciated 0.9% against the dollar, by Bloomberg data. But between May and July last year, when a Chinese hard landing was the talk among commentators, the currency depreciated by 1.7%.

This is combined with an average dim-sum bond yield of 3.8%. While Invesco admits the yield is far lower than sovereign credit in Indonesia at nearly 5.8% or the Philippines at 4.9%, both markets are not yet rated as highly as China’s offshore RMB bond market.

Fitch rates Indonesia BBB- and the Philippines at BB+, while 92% of dim-sum bond issues are above investment grade, with 60% rated AA.

The maturity for dim-sum bonds is also comparatively shorter at two-and-a-half years, compared with more than seven years for Indonesia and the Philippines.