Highlights from Morningstar ETF Intelligence 2012 Hong Kong

Jackie Choy, an ETF Strategist based in Hong Kong, shed light on investing in China with ETFs. He did a thorough investigation of the differences between A-Shares and H-Shares, noting that investors seeking Chinese equity exposure should be aware of the differences in order to pick the right “flavour”. ETFs, in turn, can be used to exploit the differences between A-Shares and H-Shares. He also reminded investors to be mindful of two potential pitfalls specific to ETFs investing in A-Shares: (1) tax issues; and (2) QFII / RQFII quotas.

The global exchange-traded product (ETP) category encompasses a number of unique product structures which have different sources and degrees of counterparty risk. Ben Johnson provided a thorough analysis on risks specific to synthetic ETFs. The risks faced by investors in synthetic replication ETFs are essentially identical regardless of domicile, and the measures taken by fund providers or otherwise imposed upon them by local regulators are also quite similar. The best practice to mitigate risks in synthetic ETFs is to stipulate full—and ideally excess—collateral and full transparency. He pointed out that in Hong Kong, the Securities and Futures Commission was a first mover in handing down what we view to be investor-friendly regulation specific to synthetic ETFs. At the same time, Johnson thought that the counterparty risk can be compensated, but that investors should perform due diligence before investing in synthetic ETFs. For more information on synthetic ETFs, please read our report "Synthetic ETFs Under the Microscope: A Global Study".

 
After the presentations, we had a panel discussion with the keynote speakers and David Quah from Hong Kong Exchanges & Clearing (HKEx) to discuss various hot topics including: Is there a broad enough ETF product range in Asia? Why do Asian investors shy away from using ETFs? Regional integration, is it possible? Cross-listings, do they help? Does ETF liquidity matter? The synthetic vs. physical debate and regulatory framework - what else do we need. Delegates were actively involved in the discussion by engaging in real-time voting, as well as Question and Answer time in between the panel topics.

 For presentation slides from Morningstar's keynote speakers, please click here.

We will publish content highlights and presentation slides from our guest speakers Marco Montanari and Chris Johnson next week in our Feature Story. Please come back again for the latest updates.