Funds Global – Asian buyers of Ucits ETFs (or US-listed ETFs) still tend to go directly to the exchange where the product has its primary listing, believing that this will give them access to better liquidity. Is this a misguided notion?
We run a global platform of our ETFs where there are listings in the US, EMEA and Asia. When to go for what? If clients have the ability to trade in the European time zone, until our local market here develops and catches up, international exposure will always be more efficiently traded in European or US hours because of a larger competitive landscape there and sheer trading volume. However, we have recently seen a local development which is very positive: trading in Hong Kong can offer differentiated benefits in terms of currency, real-time pricing and end-of-day valuation which is in the time zone, and that can attract a broader client base as well as a local client base.
In terms of liquidity, as you know, with an ETF what you see on the screen is one thing, but you can always have liquidity in the primary market, so liquidity is always there with the issuer.
In terms of Ucits availability in Hong Kong, we as a market infrastructure have supported other markets like the Mexican market distribute Ucits products. In the past, it was not possible to smoothly trade a Ucits ETFs in Latin America. We worked with the market and market makers/brokers can now trade the same Ucits in Europe and in Latin America with the same kind of spread. It is possible to easily move ETF shares from Europe to Latin America same day. We have built the same link with the Hong Kong Stock Exchange and we believe that cross-listing is feasible, bringing the same liquidity as we see in Europe to Hong Kong, and the spread should be competitive.
Up until today, when you did a cross-listing of domestic-issued Ucits ETFs, the spreads were quite high. Currently on the Hong Kong Stock Exchange you have limited cross-listed Ucits ETFs and the spread is high – 200 basis points. Why would you buy such an ETF?
Conceptually, we can support ETFs issuers in bringing a lot of ETFs from Europe to Hong Kong. Recently we underwent a big migration in Europe following Brexit, now most of the Irish ETFs are available on our platform (i.e. issued under the ICSD model), so it’s feasible to transfer those ETF products to the market in Hong Kong in an efficient way. The challenge that global asset managers are facing at present is regulatory, so it will be necessary for the market to work together to remove those challenges. I presume some asset managers are very keen to bring their Ucits products. Why? Because they are liquid, they have huge assets under management and they have competitive management fees aligned to the appetite of investors in Asia-Pacific.
Unfortunately, some managers are hesitant and say: ‘I can sell my product now over the counter (OTC) from Europe, why should I bother to cross-list and have a complex regulatory structure to navigate?’
So, in terms of Ucits products, we believe once the regulatory frictions diminish, it would be a great opportunity for Hong Kong to become the hub to distribute Ucits ETFs products in the Asia-Pacific region.
If we’re talking about trading locally domiciled products versus offshore products, whether they be Ucits or the US-listed ETFs, you’ve got to look at what the underlying strategy is. Sometimes it doesn’t make a lot of sense if you’re trading Asian underliers to wait for the US market to open when all of those stocks are now closed and then you trade into the US just because you want larger pools of liquidity or the spreads may be better. That is starting to even out where you can get decent liquidity in the local market, but if you are trading US equities or investment grade dollar bonds, then maybe it’s best to wait for the US market to open. So, that’s trading locally versus offshore, and there are definitely benefits of doing both. A lot of the ETF issuers have global platforms where you’re almost agnostic as to where it trades, as long as the client’s getting the access to the liquidity they want.
From my experience, a lot of these clients in Asia use the OTC market – they’ll get a price from a broker or a market maker in Asian hours that’s a risk-based price, so they don’t have to wait for the markets to open, they’re locked in in terms of their price and their liquidity right now and then trade versus the screen – they get a price indication from a broker and then they trade or don’t trade. There’s also the adoption of these trading platforms like Bloomberg and Tradeweb where you can put an order in there, trade into the US, again a whole bunch of market makers will quote, and then you choose your best price. That infrastructure is making the trading ecosystem way more seamless where it’s not a question of trading in Hong Kong or London. It’s more like: ‘I’ll trade everywhere, but where is it most effective from a tax perspective? Where do I get the best spread? Where are the most markets open in that jurisdiction at the moment, so the prices or at least the spreads are going to be tighter?’
That has moved a lot in the last couple of years in Hong Kong with the exchange putting in certain rules around spread tables and so on, and that has made Hong Kong a much better environment to trade in now – and certainly if you want to trade in size.
There are definite different advantages for trading on an exchange or trading over the counter. Historically many investors used to trade on the exchange, but we are seeing more and more investors trading OTC. It would be best for investors to get comfortable with both methods of trading, so when it comes to a trade, they can decide on the most efficient option. It’s like before when people tended to buy things from the shopping mall as they wanted to see the goods, whereas nowadays more and more people are used to shopping online because they believe the liquidity’s there. As with all new things, you definitely have to go through the initial set-up to get yourself familiar with the process. As some clients have told me, once they went through the OTC trading once or twice, they get used to the process and find it quite convenient.
In the past, I have seen a lot of investors saying that their US liquidity is much better if they want to trade any US-underlying ETFs – even though they are listed in Asia, they prefer to trade a US one. But as everyone is saying, there is so much market development and new events on the OTC, so I have seen more adaptive trading behaviour where investors are more adaptive to trade US or European-underlying with the ETFs listed in Asia, and market makers are doing a good job on providing the liquidity and risk pricing. My observation in the Hong Kong market nowadays is that bid-ask spreads are much tighter and there’s definitely enough volume on both bid-ask sides of the screen (secondary market). There are quite a few global trading houses here as increasing market makers in Hong Kong can provide a good risk price to the investors, so the whole environment has been improving. This is a very important factor for us in terms of thinking about new product strategy, not only Asian-underlying listed in Asia, we can do global portfolios.
Investors should be aware that the true liquidity is what your ETF is truly investing in, it’s not the ETF volume. Investors traditionally tend to have a habit of looking at the volume of the ETF, whereas the true liquidity is what you are investing in in your ETF, not the ETF itself. Those education points need to come across for them to know which exchange they choose. On screen has been the preference lately, but again it’s not just the volume, it’s not just what’s on the screens that you are going to invest in. Even where the ETF is not taking millions of volumes, what you invest in as underlying is liquid enough, it doesn’t really matter where your venue is.