Keith Chan, Director, Head of Listed Product Sales at HSBC, says that it is important to educate investors that although a specific exchange-traded fund (ETF) shows low turnover volume, it does not mean it is illiquid.
The real indicator of liquidity for an ETF is the liquidity of the underlying constituents. As long as the underlying stocks for an equity ETF, for example, operate in liquid markets, ETFs can be bought back or issued at any time, through its unique creation and redemption process.
Chan explains, “Even if turnover is zero for a specific ETF, we can still issue an ETF with relative ease and roll out to the client very quickly via the primary market whenever a large institutional investor comes in and wants to buy an ETF. He can even simply call us for a price to match in the secondary market.”
Buy and hold
It becomes particularly important that investors don’t confuse lack of turnover with lack of liquidity when it comes to Greater China theme funds, for example.
HSBC has recently launched four Greater China ETFs, tracking the MSCI Taiwan, Hong Kong, China and Golden Dragon indexes.
“Greater China is obviously a popular investment theme. Although the markets for Greater China ETFs are very liquid, it is also not a surprise that some large institutional investors are long on this region and therefore adopt a buy and hold strategy for HSBC ETFs as a core investment,” says Chan.
But with this buy and hold strategy, it might appear to an institutional investor that the markets for these ETFs are illiquid because there are no daily tradings, which therefore reflects a lower trading volume. “However, investors should know that, as long as the underlying constituents of our ETFs – which are mainly listed in Hong Kong – are liquid, and in this case they are, then at any time HSBC can fulfil our commitment to buy back the ETF. But, more importantly, we can physically hold more of the underlying and package it into an ETF issuance for the client through the ETF creation process in the primary market,” adds Chan.
In fact it is this commitment at HSBC that has enabled it to be the sole market-maker for their ETF issuance. “If there are many market-makers, there are often spread differentials. However, as the only market-maker for our ETF, we stand by our commitment to keep the bid and offer spreads tight in the secondary market and offer bid and offer prices for those institutional investors looking to buy or sell above the maximum lot sizes shown on the trading screen.” Chan explains, “All the client needs to do is to pick up the telephone and call us. We are committed to selling or buying the ETF at one price despite the number of units.”
Transparency and simplicity
There are several new themes on the horizon, according to Chan. Investors are interested in commodity ETFs, namely gold or alternative energy. Equity ETFs are also coming to the fore, but HSBC’s current strategy is to return to basics, especially at a time when investors are finally starting to gain back confidence in the financial industry.
“With our Greater China ETFs tracking MSCI indexes, investors, be they retail or institutional, are comfortable with the underlying markets. Our ETFs also maintain transparency and simplicity,” says Chan.
The HSBC Greater China ETF series are the first in the industry. HSBC is the first to launch an ETF tracking MSCI Hong Kong Index in the Asian time zone. It is also the only fund house to launch a physically replicated ETF tracking MSCI Taiwan Index. In addition, HSBC is the first to launch an ETF that tracks the MSCI Golden Dragon Index globally.
It is important that ETFs tracking Asian stocks are listed in the region, especially for investors who are more comfortable with physical replication. “Investors should find that our ETFs and their underlyings trading in the same time zone are a benefit compared to those listed in the US or Europe. This is because the pricing is real time with the underlyings and the market to buy or sell their ETF holdings should be more liquid.”
HSBC acknowledges ETFs can allow investors to access all asset classes, “but right now for the market, it is more important to roll out products that are easy to understand and relevant,” adds Chan.
The Hongkong and Shanghai Banking Corporation Limited
The Hongkong and Shanghai Banking Corporation Limited is the founding and a principal member of the HSBC Group, which, with around 7,500 properties in 87 countries and territories and assets of US$2,455 billion at December 31, 2010, is one of the world’s largest banking and financial services organisations.