Hong Kong, 3 May, 2018 – Brown Brothers Harriman (BBH), a market-leading ETF custodian, administrator, and trustee, today announced the results of its inaugural Greater China ETF Survey, which highlights that the potential inclusion of ETFs in China-Hong Kong Stock Connect would likely unleash pent-up demand for Hong Kong ETFs from Mainland Chinese investors.
Nearly 90% of Mainland investors surveyed say they would likely invest in ETFs through the Stock Connect program, which allows international investors to trade securities listed on the Shanghai and Shenzhen exchanges, and Mainland investors to trade securities listed on the Hong Kong exchange. While ETFs are not currently part of the Stock Connect program, regulators are planning their future inclusion as early as late 2018.*
The results also point to strong ETF investment growth across Greater China in 2018 and an uptick in investor demand for products with diversified exposure. While 43% of Mainland investors plan to increase their ETF holdings, 65% of investors surveyed in Hong Kong and Taiwan are looking to increase their ETF exposure.
Chris Pigott, BBH's Head of Hong Kong ETF Servicing, says: “Regulatory reform has helped spur the growth of ETFs in the US and Europe. The inclusion of ETFs in Stock Connect will open another cross-border channel for Mainland investors to deploy their capital and further diversify their investment outside the Mainland. This development presents a significant opportunity for regional and global asset managers.”
BBH surveyed 100 financial intermediaries and institutional investors from the Mainland, Hong Kong and Taiwan – all of whom were invested in ETFs. The survey provides insights into the current state and future of ETFs in Greater China’s rapidly expanding and evolving markets.
Additional key findings include:
- ESG is increasing in importance: 48% in the Mainland, 60% in Hong Kong, and 75% in Taiwan said they consider Environmental, Social and Governance (ESG) factors “very important” to their investment decisions.
- Smart Beta demand is accelerating: The majority of respondents in Hong Kong (58%) and Taiwan (60%) plan to increase their use of smart beta ETFs over the next 12 months. However, only 38% of Mainland investors plan to do so.
- Investors want more education: Of the investors who aren’t planning on increasing their ETF investment this year, 41% highlighted education and 39% noted trading cost as the main drivers.
“Some investors are put off by low trading volumes. Liquidity continues to be an area of focus for investors as some products in Greater China don’t have heavy volumes and a number don’t trade significantly on a daily basis, but the underlying assets they are invested in are liquid. Education could be a key to unlocking future growth,” Pigott says.
BBH concludes that there are challenges that need to be overcome to support the growth of ETFs in the region. Distribution incentives and commission based fee structures continue to be widely utilized, which don’t align with the low-cost nature of ETFs, and retail adoption is a small allocation of total investment. However, it is clear that ETF adoption in Greater China is a question of “when” not “if”, and given the survey results and forthcoming regulatory initiatives, we expect “when” to be sooner than later.
*Inclusion of ETFs in Stock Connect is yet to be launched and details and timing of the program have not been announced.
About Brown Brothers Harriman
BBH is a privately held financial institution that has been a thought leader and solutions provider for 200 years. The Firm serves businesses, institutions, individuals and families in its three business lines: Investor Services, Investment Management, and Private Banking. BBH’s Investor Services business provides cross-border custody, accounting, administration, execution and technology services to many of the world’s leading asset managers and financial institutions.
With deep ETF product expertise, BBH works with both experienced ETF managers and new, innovative market entrants to introduce and grow their ETF products. BBH helps asset managers launch, list, and cross-list ETFs across the globe.
The firm has also made a strategic decision to invest in a custom, market leading technology platform specifically designed to service ETFs:
- ETF ConnectTM, offering online access to client data, reporting and other powerful tools that promote business management
- AP EXchangeTM, offering trade functionality and the flexibility to submit and monitor, create and redeem activity
- ETF Star, an ETF-specific platform that is fully integrated with BBH’s core accounting system with focus on basket and Portfolio Composition File (PCF) generation
BBH operates in eighteen locations, including New York, Boston, Beijing, Charlotte, Chicago, Denver, Dublin, Grand Cayman, Hong Kong, Kraków, London, Luxembourg, Nashville, New Jersey, Philadelphia, Tokyo, Wilmington, and Zürich. For more information, please visit bbh.com.
About Brown Brothers Harriman Hong Kong
BBH Hong Kong has been servicing Hong Kong based clients for nearly 30 years. As a cross-border specialist with a strong focus on Greater China, BBH is a market leader in helping global asset managers access the region's growing capital pools, and Greater China managers looking to distribute their products globally.