Hong Kong welcomes its first 2x inverse ETP

May 28th, 2019 | By | Category: Equities

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The Hong Kong stock exchange has welcomed its first leveraged inverse ETP, the CSOP Hang Seng Index Daily (-2x) Inverse Product (7500 HK).

Hong Kong welcomes first 2X inverse ETF

Inverse and leveraged ETFs were first approved for listing in Hong Kong in February 2016.

It has been launched by local investment manager, CSOP Asset Management.

Brian Roberts, Head of Exchange Traded Products at Hong Kong stock exchange (HKEX), commented, “The listing of the first two-time inverse product on HKEX represents significant progress in the development of Hong Kong’s leveraged and inverse products market.

“Our emphasis on enriching our product mix aligns with the growth focus in HKEX’s latest strategic plan – to develop Hong Kong as the hub for ETPs in Asia.”

The ETP uses derivatives to provide twice the inverse daily return of the Hang Seng Index, a reference for the 50 largest companies listed locally in Hong Kong, meaning it profits from a decline in the Hong Kong stock market.

The Hang Seng weights constituents by float-adjusted market capitalization, subject to a 10% cap per stock in order to promote diversification.

The index contains a notable tilt towards financial stocks which make up nearly half (48.4%) of its total weight. The next largest sector exposures are property & construction (11.2%) and information technology (10.8%).

Index performance is influenced significantly by its largest constituents with the top ten stocks accounting for 61.4% of the overall exposure. The largest of these constituents are Tencent (10.5%), HSBC (10.3%), AIA (9.8%), China Construction Bank (7.6%), and Ping An (5.3%).

The Securities and Futures Commission (SFC), Hong Kong’s financial markets regulator, first granted approval for the listing of inverse and leveraged ETFs in Hong Kong in February 2016. Previously, the regulator had flagged up several concerns with inverse and leveraged ETPs, such as their inappropriateness for retail investors who may not fully understand the risks involved, and proved reluctant to approve them.

The SFC noted that, despite inverse and leveraged ETFs offering an efficient means for investors to take on tactical exposure, such products tend to decay in value if held for an extended period of time, potentially leading to significant losses especially in volatile but range-bound markets.

But as Hong Kong’s ETF market began to fall behind regional rivals in terms of product innovation and asset flows, the SFC agreed to approve inverse and leveraged products in a bid to stimulate growth within the local ETF industry.

The SFC included several caveats in its initial approval: inverse and leveraged ETFs tracking Hong Kong and mainland China equity indices were forbidden, leveraged products were limited to 200% daily exposure, and leveraged inverse ETFs were also disallowed.

Following a positive response to the first flurry of listings, the SFC loosened restrictions in January 2017 and granted approval for products tracking local equity indices and those providing leveraged short exposure, hence today’s launch.

Today, the market capitalization of inverse and leveraged products has grown to $5.96 billion, as of 27 May 2019, accounting for approximately 2% of the total market capitalization of ETFs listed in Hong Kong.

The products also account for a relatively large proportion of trading volume. Year-to-date, the average daily turnover (ADT) of these products has reached $234 million, accounting for roughly 4.8% of the total ADT of all Hong Kong-listed ETFs.

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