Leveraged and inverse ETF use on the rise in Asia

Apr 5th, 2016 | By | Category: Alternatives / Multi-Asset

Trading volume in exchange-traded funds in Taiwan has increased by 45% since October 2014, driven by strong demand for short and leveraged (S&L) products, according to research from global analytics firm Cerulli Associates. The number of S&L funds in Taiwan increased from four to ten during 2015 and attracted $1.7bn in net inflows.

The report found that retail participation in Taiwan increased to 50% by the end of 2015 and notably, Taiwanese investors seem to be broadening their interest to include ETFs focused on foreign markets, including riskier S&L strategies. Domestic ETFs saw assets decline by 41% from June 2015 to December 2015, while overseas-invested ETF assets grew by nearly 15% over the same period.

Leveraged and inverse ETF use on the rise in Asia

ETF trading activity in Hong Kong is expected to significantly increase following the introduction of inverse and leveraged products later in the year.

The figures are a boon to the Asian region, which will see Hong Kong launch the products later this year. It comes after the city’s Financial Services Development Council announced its intention to facilitate the launch of S&L products following concerns that the city’s ETF industry may fall behind the likes of mainland China, Taiwan, South Korea and Japan.

The note from Cerulli commented that it was likely Hong Kong ETFs would experience a similar surge in trading activity this year, on the back of strong demand for new S&L ETFs. Despite the excitement surrounding the new launches, Hong Kong authorities remain cautious over the inherent risk within these products, having limited initial launches to tracking “liquid, broad-based non-Hong Kong, non-Mainland foreign equity indices”

Leveraged ETFs magnify exposure to an underlying index, while inverse ETFs profit from a decline in an underlying index. The funds use derivatives to obtain their respective exposures and are required to re-balance their positions on a daily basis.

Cerulli notes that following the approval for S&L ETF development in Hong Kong, certain foreign asset managers, such as Samsung Asset Management and Mirae Asset Management, have expressed their interest in bringing expertise in these products from their home market in South Korea to Hong Kong. There is also a talent hunt for ETF specialists in Hong Kong which is likely to intensify, especially if leveraged and inverse ETFs take off there.

That being said, Cerulli expects Hong Kong to continue to be behind the curve in developments in the ETF space compared to Taiwan. With a head start to S&L ETFs over Hong Kong, Cerulli believes that Taiwan will continue to set the pace between the two jurisdictions for future developments in the space.

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