Hong Kong fixed-income ETFs to draw demand, but will they be enough?

This analysis is by Bloomberg Intelligence Senior ETF Analysts Rebecca Sin and Eric Balchunas. It appeared first on the Bloomberg Terminal.

Hong Kong issuers could continue to launch more fixed-income ETFs to diversify product offerings and satisfy investor demand, but it’s not clear if volume will be enough in a rate-cutting environment. Hang Seng Investment Management Ltd.’s recent fixed-income offering exceeded the average ETF launch size and may help expand Hong Kong’s ETF market as it reaches a record $65 billion in AUM.

Hang Seng’s US Treasury ETF exceeds average launch

Hang Seng Investment Management could launch more fixed-income and specialized products to meet demand as Hong Kong prepares for the Saudi-China Connect program, which may attract more Saudi money to the market. Hang Seng Investment launched its first fixed-income ETFs, Hang Seng CMS Bloomberg US Treasury 1-3 Year (3436 HK) and Hang Seng CMS Bloomberg US Treasury 7-10 Year (3435 HK), which each gathered more than $25 million in assets under management. That exceeded the average ETF launch size of $5.6 million in Hong Kong. Fifty-two percent of all ETF launches in Hong Kong this year have seen fund flows of between minus $5 million and plus $5 million. In the APAC region as a whole, 100 ETF launches this year are in this category.

More fixed-income ETF launches look likely

Hong Kong could see more fixed-income ETF launches in coming months as investors search for yield and issuers diversify away from traditional equity products to round out their offerings. Hang Seng launched its first fixed-income ETF on Sept. 16 and we could see more to come as it currently only has 13 ETFs listed in Hong Kong with $27 billion in AUM. Throughout Hong Kong, there are only 19 fixed-income ETFs with a total of $5.7 billion in AUM, so this sector could grow (the entire ETF market in Hong Kong has 186 ETFs with $65 billion in AUM). Growth in ETFs based on fixed income and specialty asset classes such as derivatives could be the next trend for investors.

Many HK ETF launches struggle to attract AUM

Hong Kong’s recent stock-market rally has helped ETFs, which were launched there almost 25 years ago, reach a record $65 billion in AUM vs. $47 billion in 2023. ETF launches could continue to struggle, however, as many don’t gather sufficient AUM at the start, as seen in recent launches this year.

Hong Kong could have record year in AUM growth

BlackRock leads HK ETF flows with $1.3 billion

Hong Kong has seen $2.4 billion of inflows year-to-date, led by iShares Core MSCI China (2801 HK), as the equity market rebounds and investors’ interest in the region recovers. The Hong Kong ETF market could benefit from the recent revival of international demand for Chinese equities.

2024 on path to break ETF launch record

A record 520 ETF launches could take place in Asia-Pacific in 2024, we believe, surpassing the previous high of 507 in 2021. Mainland China may account for 275, also a record, largely driven by sector ETFs. Some 362 ETFs have been launched in the first eight months of 2024. With an average of 45 new ETFs a month this year, we believe the total could reach 520, even with a potential slowdown toward year-end.

Among Asia’s ETF markets, Hong Kong has had the strongest growth of ETF launches. The city launched 25 ETFs from January to August, compared with 11 during the same period last year.