BGI to launch its own Tracker Fund

ETFs in Asia have floundered, except for SSGA''s Tracker Fund of Hong Kong, which enjoys unique government backing.
Barclays Global Investors is preparing to launch an exchange-traded fund (ETF) based on the MSCI China Free Index in Hong Kong, and the name of the fund will include the term 'Tracker', says Mark Roberts, principal and product strategist. He will be moving from Tokyo to Hong Kong next month to oversee the launch.

Roberts says officials at Hong Kong's Securities and Futures Commission suggested the use of the Tracker name as well as BGI's trademarked iShare name, no doubt to make a connection among retail investors with the hugely successful Tracker Fund of Hong Kong (TraHK), which follows the Hang Seng Index. Local retail investors in general have little awareness of MSCI indices and the officials want to ensure the new ETF is a success.

This is likely to annoy BGI rival State Street Global Advisors, which manages TraHK. That ETF was established in 1998 when the government had to find an elegant way to dispose of its massive shareholdings in the wake of its crisis market intervention.

Vincent Duhamel, principal and CEO at SSGA in Hong Kong, said he was unaware of BGI's use of the Tracker name. "It is a sort of compliment that they are copy cats," he says. "We'll see what we can do about that."

The BGI product was originally synchronized with the expected accession of China to the World Trade Organization in October, but for now the WTO issue has been postponed in the aftermath of terrorist attacks in America. Roberts adds that for now while the fund is still on track, it could be postponed if some leading authorized participants (brokers that create and redeem ETF units) such as Salomon Smith Barney and Morgan Stanley do not feel ready to proceed following the disastrous attack on the World Trade Centre. Other APs lined up for the BGI fund include Goldman Sachs and UBS Warburg. BGI will also offer the fund via web brokers and private banks.

Since SSGA's TraHK listed on the Hong Kong Stock Exchange it has been a massive success, with $3.8 billion under management, strong trading volume and high institutional and retail participation. The government also made juicy offers at the initial public offering, promising buyers additional units if they held the fund over a period of time. It is denominated in Hong Kong dollars and involved the local market.

BGI hopes the China Tracker will demonstrate that ETFs can be popular in Asia without having the explicit backing of governments. TraHK's success contrasts with two other ETFs since listed in Hong Kong by BGI, based on the Taiwan and Korea MSCI country indices; local trading has been negligible. ETF managers are finding in general that cross-listed ETFs do not do very well; most of them in Europe also languish. But with deep, liquid markets in the US and Britain, even very niche ETF products can find demand, but niche products in Asia have yet to prove themselves. 

If this new product is a success, Roberts envisages bringing iShares based on major US indices such as the Standard & Poor's 500 to local investors.

BGI has also recently launched an ETF in Japan tracking Topix, as have the securities arms of Daiwa, Nikko and Nomura.