HKEX Insight

Active ETFs combine the benefits of traditional ETFs with the potential for active management. The performance registered recently may be explained, in part, by the changing market environment. 

Central bank interest rate hikes have also increased market volatility and higher rates have impacted single stock returns, creating opportunities for active managers.

In such conditions, active ETFs with tactical management approaches that respond to market changes and identify emerging market trends may have become more attractive to investors seeking returns that outperform the benchmark index or overall market.

Furthermore, the growing trend of converting existing mutual funds into ETFs among asset managers has been providing an additional impetus to the inflows of active ETFs.

According to Bloomberg Intelligence, more than 70 mutual funds have undergone conversion, bringing in an inflow of US$96 billion in assets as of end-2023. Mutual fund conversion presents an attractive avenue for asset managers to expand their investor base while retaining the existing investor base and track record.

The buoyancy seen in global active ETFs markets has been particularly pronounced in Asia.

Active ETFs in the Asia Pacific region saw US$9.2 billion of net inflows in 2023, up 220% year-on-year.

Moreover, the growth rate of AUM in actively managed ETFs in the region reached 82% y-o-y in 2023 compared to the previous year, albeit from a smaller base, making it the fastest-growing region for active ETFs.

Active ETFs developed a little later in the Asia Pacific region than in the US and Europe, but Hong Kong is one of the most advanced markets in terms of product innovation, ecosystem development and capital flows.

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Hong Kong’s ETF market now includes a range of exposures, including commodity, equity, fixed income, money market and virtual asset classes, as well as a wide range of themes such as healthcare, metaverse, technology and energy.

The growth is partly down to the increasing preference for ETF investments in global markets, but it is also partly to do with the proactive steps taken in recent years to improve the structure, competitiveness and diversity of Hong Kong’s ETF market.

HKEX has taken a leading role in improving the attractiveness of the ETF market with a series of market structure enhancements since 2019, including a settlement extension, stamp duty and trading fee exemptions for market makers to support liquidity, new requirements that tighten market making obligations and a reduction in tick sizes (minimum price movements), to name a few. Most recently, the SFC announced plans to allow spot virtual asset ETFs to list in Hong Kong.

So, with the release of new products, implementation of market structure improvements and the shifts taking place in global markets, the active ETF market seems poised for significant growth as investor demand continues to surge, presenting a wealth of opportunities for ETF issuers to explore and expand into.

Hong Kong’s growing ETF space offers a number of trading advantages, including a diverse range of exposures, trading in the Asian timezone and the city’s simple and low tax regime. For more information about active ETFs, and the Hong Kong ecosystem, visit HKEX’s dedicated webpage here for the latest insights and product updates.

1. What are the benefits of trading Hong Kong-listed ETFs?

   There are a number of advantages to trading ETFs listed in Hong Kong, including the opportunity to diversify portfolios with exposure to a range of geographies, asset classes and investment themes, including but not limited to, commodities, fixed income, sector-based, thematic (e.g. ESG, technology and virtual asset) and smart beta funds.

   In addition, Hong Kong-listed ETFs trade in the Asian time zone, enabling investors to trade Asian underlying within a much narrower band of premiums and discounts compared to US-listed ETFs. This means that they do not deviate from their fair values as much, making them an ideal choice for trading in the secondary market.

   Further, investors opting for a Hong Kong-listed ETF benefit from the city’s simple and low tax regime, where the tax rate on ETFs is up to 30% lower than that of their US-listed counterparts, allowing investors to transform tax savings into extra investment returns.



2. How has Hong Kong's ETF market been affected by the government’s decision to reduce stamp duty on stock transactions from 0.13% to 0.1%?

   The stamp duty for trading ETFs in the secondary market in Hong Kong has been waived since 2015, which is still e­ffective after reduction in stamp duty on stock transactions. In other words, when trading Hong Kong-listed ETFs in the secondary market, investors do not incur stamp duty.

   Additionally, in the primary market, since August 2020, ETF market makers have been enjoying zero stamp duty on stock transactions when they create and redeem ETF units in Hong Kong, resulting in lower creation and redemption costs for market makers. As a whole, all stamp duty waivers reduce transaction costs for trading ETFs.



3. What does the inclusion of ETFs in Stock Connect mean for HKEX?

   The inclusion of ETFs in Stock Connect is the latest milestone in HKEX’s landmark mutual market access programme with Mainland exchanges. It broadens the Connect product ecosystem and opens up opportunities for investors. In addition, it helps support Mainland Chinese investors’ diversification to offshore assets and strengthens our position as the global base for China-bound investments.

   The expansion of Stock Connect to include ETFs also provides issuers with an additional channel to access Mainland Chinese investors, thus encouraging more ETF issuance and trading in Hong Kong. This, in turn, will further expand HKEX’s ETF product diversity and enhance liquidity.



4. What are the benefits for issuers from active ETFs?

   By listing active ETFs, fund managers can save on commissions that they would otherwise pay to external fund distributors. It enables direct distribution to investors, eliminating the need for intermediaries and allowing investors to access the fund’s strategy without incurring additional fees from financial advisors.



5. What benefits do active ETFs offer investors?

   Active ETFs o­ffer investors the potential to generate excess returns above a benchmark index. Active ETFs can be an ideal vehicle for tactical allocation, which involves adjusting portfolio allocations in response to changing market conditions or macroeconomic events. Active ETFs have become a favoured platform for integrating ESG factors into investment decisions, and may allow for more eff­ective corporate engagement between asset managers and investee companies, enabling them to work together to create value and mitigate ESG risks.



6. What are active ETFs?

   Active ETFs combine the benefits of traditional ETFs with the potential for active management.



7. How much market share do active ETFs have of the global ETF market?

   Active ETFs currently constitute approximately 6% of the global ETF market’s asset base. Over the past five years, the compound annual growth rate (CAGR) of active ETFs stood at around 48%, more than three times the rate of passive ETFs and the overall industry, according to Morningstar data.



8. When was the first active ETF listed in Hong Kong?

   Hong Kong’s first active ETF was listed in June 2019 and by the end of 2023, there were 24 active ETFs being traded on HKEX with a combined market capitalisation of HK$8.6 billion.