Second Hong Kong ETF provider cuts fees

Added 17th October 2016

Vanguard has followed BMO Global Asset Management in cutting costs associated with its Hong Kong-listed ETFs with the aim of attracting more capital.

Second Hong Kong ETF provider cuts fees

Charles Lin, head of Greater China at Vanguard

Vanguard's FTSE Japan Index ETF now charges a total expense ratio (TER) of 0.18%, seven basis points lower than before.

According to the firm's data, this is now about half the average TER of other ETFs within the same category.

 Name of ETF   Launch date   Fund size (HK$m)   Previous TER   New TER 
 Vanguard S&P 500 Index ETF   18/05/2015   103.9  0.25%  0.18%
 Vanguard FTSE Developed Europe Index ETF  13/06/2014   122.6  0.25%   0.18%
 Vanguard FTSE Japan IndexETF  13/06/2014  91.0  0.25%   0.18%
 Vanguard FTSE Asia ex-Japan Index ETF  10/05/2013  128.6  0.38%  0.20%
 Vanguard FTSE Asia ex-Japan High Dividend Yield Index ETF  13/06/2014  216.9  0.45%  0.35%

Source: FE Analytics

In September, BMO GAM cut the cost and minimum unit size for primary market creations and redemptions on its seven Hong Kong-listed ETFs with the aim of pulling in more capital.

ETFs have trouble gathering assets in Hong Kong for several reasons, including the lack of buyer education and the dominant commission-based fund distribution model, which does not incentivise distributors to use ETFs.

For example, Vanguard's US-listed S&P 500 ETF charges only 0.05% - one-third the charge of the same product in Hong Kong - because in the US market where ETFs are popular the product was able to accumulate assets of $260.5bn (£213.6bn, €237.4bn).

“Hong Kong today is still very much a ‘pay for play’ market," said James Martielli, head of portfolio review for Asia, referring to the prevalent commission-based distribution model. "We do start to see growth in discretionary portfolio management, model portfolios and increased transparency”, which support ETF development in the region, Martielli said.

“A lot of institutions sometimes go to Ucits or US ETFs, but the reduction in fees [in Hong Kong] makes it more compelling to say that [ETFs] are convenient, cost effective and more in line with the TER seen in other regions,” he continued.

In Hong Kong, the firm is looking to expand its ETF and mutual fund product lines, he added, but did not provide details.

The group manages $130bn of assets in Asia Pacific, only 3.4% of its overall assets under management around the globe ($3.8trn).

Seeking onshore investors

ETF Connect, which allows cross-border trading and is expected to be launched next year, is a potential driver for ETF development in the SAR amid demand from China's onshore retail investors, said Vanguard's head of Greater China, Charles Lin.

“With the RMB now having a more floating exchange rate, we see Chinese investors pay more attention to diversifying the risks to their portfolios. If you look at the mutual fund industry in China right now, with only 18 years of development, 5% [of assets] are index funds or ETFs, which is better than in the US during the 1990s.”

He added a lot of QDII funds – onshore funds that invest in overseas markets using designated quota under the Qualified Domestic Institutional Investor scheme – already invest in US-listed Vanguard ETFs as underlying assets. But those are mainly institutional investors, Lin noted.

“After the launch of the ETF Connect, I believe it will provide an additional channel for [onshore] retail investors to buy our ETFs.”

Tobias Bland, chief executive of Enhanced Investment Products, which has listed ETFs in Hong Kong, shared similar views.

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