Last Updated: 30 November 2022
After a year in which synthetic ETFs seemed under increasing threat from regulators, 2012 has got off to a much better start. Not only did ESMA, the European markets regulator, stop short of imposing greater restrictions on swap-based ETFs than on their physically-backed rivals, but the Hong Kong Securities and Futures Commission (SFC) has shown that market is again open for new synthetic launches.
Unsurprisingly, Deutsche Bank—the biggest issuer of synthetic ETFs in Asia— led the way, with the listing of six new products in its db x-trackers range. The products themselves are nothing unusual, consisting of trackers for the MSCI China (on a total expense ratio of 0.65 percent), MSCI India (0.75 percent), MSCI Malaysia (0.5 percent), MSCI Thailand (0.5 percent), MSCI Indonesia (0.65 percent) and an Australian dollar money market fund (0.2 percent). What’s more notable is how long they’ve taken to arrive.
Prior to this, the last synthetic launches approved by the SFC were in July 2010. In the 18 months in between, it has approved 12 physical ETFs, while bringing in new, tougher rules on collateral for Hong Kong domiciled synthetic ETFs. The db x-trackers products are Luxembourg domiciled, like the rest of its range, and so technically not subject to the new SFC restrictions, but there were still extensive discussions on product structure during the approval process, according to Asian Investor magazine.
Deutsche Bank’s decision to commit to Hong Kong is interesting given that its main rival, Lyxor, has confirmed that it will delist all 12 of its funds from the exchange in March due to low trading volumes. Once this happens, db x-trackers will be the only major provider there whose business is built around synthetic replication. Other local providers have used synthetic structures only for products that access the mainland A share market, where restrictions on investment make conventional physically based structures impossible.
However, Deutsche Bank won’t be completely alone in the market. Local boutique Enhanced Investment Products (EIP) received approval for seven emerging market synthetic ETFs, which will launch in mid-February.
These will track benchmarks in India, Indonesia, Korea, Malaysia, the Philippines, Taiwan and Thailand. Details are limited so far, but the funds will presumably offer something beyond straightforward tracking of the regular local benchmarks if EIP feels it can succeed where the deeper-pocketed Lyxor gave up.
Mirae continues Hong Kong expansion
Staying in Hong Kong, Korean provider Mirae finally took the next step in its overseas expansion with the launch of seven new Hong Kong-listed ETFs. All are physically-backed funds with a TER of 0.75 percent. They join an existing Mirae tracker for the Korea’s Kospi 200 benchmark, which arrived in January 2011, and suggest the firm is setting its sights on wider international appeal.
Five of the products are based on the S&P Asia ex Japan, Australia and New Zealand indices and track the financials, IT, industrials, energy and materials sectors. Despite being regional funds, some of these have heavy country or company concentrations, reflecting the unequal distribution of major stocks within the region.
For example, the financials ETF has a heavy weighting towards Chinese and Hong Kong stocks, both banks and real estate developers, which combined take up more than 50 percent of the basket. The IT fund has almost 40 percent each in Korea and Taiwan; Korea’s Samsung Electronics alone accounts for almost 30 percent.
The industrials fund is more evenly distributed, with conglomerates from Hong Kong, Korea and Singapore making up the major holdings. The energy tracker holds overwhelmingly state-owned Chinese firms, which account for more than 50 percent of the portfolio, while India accounts for almost 25 percent. Lastly, the materials ETF has a strong bias towards Korea and Taiwan, with the two countries accounting for almost 35 percent each.
It’s interesting to see the arrival of more sector ETFs for Asia, following Lyxor’s launch of MSCI Asia ex Japan sector trackers early in 2011. But one of the other two launches may well attract more attention, given that investors are increasingly attracted to the theme of emerging market consumer growth.
The S&P Emerging Asia Consumer ETF is a reasonably well-balanced index that balances the major regional markets. China accounts for around 32 percent of the portfolio, India 23 percent, Indonesia 19 percent; there is also a weighting of 15 percent for Malaysia and smaller allocations to Taiwan and Thailand.