HSBC first out the door with bond ETF

Assuming regulators sign off, it will announce a Hong Kong dollar ETF on June 20.

HSBC Asset Management is expected to announce the launch of a Hong Kong dollar exchange-traded fund on June 20, with the actual launch slated for the following day, provided it meets approval from the Securities and Futures Commission, firm executives confirm. It will be listed on the Hong Kong Stock Exchange.

The product is to be initially seeded by 11 of the region's central banks supporting the Asian Bond Fund initiatives. But HSBC-AM officials would not comment on the structure of the ETF, noting the process has been driven by the Hong Kong Monetary Authority, which has been leading efforts on the second Asian Bond Fund on behalf of the grouping of central banks, known as EMEAP. HKMA declined to comment.

This will be the first of three ETFs launched to support ABF-2. State Street Global Advisors, manager of the $1 billion Pan-Asian Index Fund, is aiming at a July 7 launch of a PAIF ETF. DBS Asset Management, charged with managing the Singapore dollar sleeve of ABF-2, is looking at an August date for its Sing-dollar ETF.

These will be the first bond ETFs in Asia, and participants are unsure about liquidity in the underlying assets. Even more of a challenge may be undeveloped yield curves. Nonetheless, interest in the pan-Asian bond ETF is said to be particularly strong, especially from Japanese brokers, but the fund managers will have to be careful in how much unit creation they tolerate. Not only will liquidity be a challenge, but these ETFs risk crowding out other investors. This is a major challenge for the pan-Asian fund, which must operate in markets such as Indonesia and the Philippines, although it is less of an issue for the HSBC and DBS products, given the relative depth of the Hong Kong and Singapore dollar markets.

Launching ETFs was apparently one criteria for bidding for the ABF-2 mandates, say market players. The HKMA has been keen to find ways to develop local bond markets and has pushed the idea of using ETFs.

The ETFs will be based on the iBoxx series of indices for ABF, created by International Index Company.

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