The Securities and Futures Commission (SFC) today publishes a revised circular to allow SFC-authorised feeder ETFs under master-feeder structure to invest in overseas-listed master ETFs – including actively managed ETFs – from different markets under streamlined requirements provided certain conditions are met (Note 1).

Assets under management (AUM) of the global ETF market continued to grow and reached US$12.7 trillion at the end of the first quarter of 2024 (Note 2). In particular, the growth of actively managed ETFs has significantly outpaced that of the overall ETF market over the past five years (Note 3). In Asia-Pacific, actively managed ETFs have been growing rapidly with their AUM growth in the region reaching 82% in 2023 (Note 4), whereas their market share in Hong Kong soared to 13% at the end of 2023 from 1% at the end of 2019 (Note 5).

Against this backdrop, product issuers recently expressed to the SFC their strong interest in bringing well-established actively managed ETFs from overseas to Hong Kong, potentially through the route of a master-feeder fund structure and taking advantage of the Hong Kong ETF market's strong turnover growth (Note 6).

Having considered the potential benefits of actively managed ETFs to investors and to facilitate Hong Kong ETF market’s growth, the SFC considers it appropriate to extend the existing streamlined requirements for master ETFs to actively managed ETFs (Note 7). The SFC will also broaden the types of schemes that are eligible for the streamlined requirements provided that they have satisfactory safeguards in place and demonstrable benefits to the Hong Kong market.

“Further streamlining the requirements for master-feeder ETFs will bring cost-saving and provide flexibility to ETF issuers, and broaden investment choices for investors, whilst ensuring appropriate level of investor protection remains in place,” said Ms Christina Choi, the SFC’s Executive Director of Investment Products. “This will also enhance Hong Kong’s competitiveness in attracting overseas ETFs and strengthen its position as a premier asset management hub.”

Under the streamlined requirements, with immediate effect, master ETFs:

·will cover both passively and actively managed ETFs without the SFC authorisation (Note 8);

·will not confine to specific types of schemes so long as they have a sizable AUM with a good track record (Note 9); and

·must be schemes with satisfactory safeguards and measures in place to provide substantially comparable investor protection as ETFs authorised by the SFC.

The SFC will continue to engage the industry on initiatives which would facilitate market development and be beneficial to the Hong Kong market as a whole.

End

Note：

1.A master-feeder fund structure refers to a fund (the feeder fund) that invests 90% or more of its total net asset value in another single fund (the master fund). Such funds are permitted under para. 7.12 of the Code on Unit Trusts and Mutual Funds provided that both the feeder fund and the master fund are authorised by the SFC. The SFC has been adopting streamlined requirements since December 2019 to allow an SFC-authorised feeder ETF to invest in an eligible overseas-listed master ETF without SFC authorisation on a case-by-case basis.

2.Source: ETFGI, Press release (April 2024), available here.

3.Source: ETFGI, Press release (April 2024), available here.

4.Source: HKEX, ETF Spotlight – Active ETFs: A game changer in the investment world, available here.

5.Market share in terms of number of ETF listing, compared to the overall Hong Kong ETF market.

6.The turnover of the Hong Kong ETF market grew 26% annually on average from 2018 to 2023.

7.The potential benefits of actively managed ETFs to investors include intra-day liquidity, transparency and alpha generation at competitive fee, as well as the associated innovation opportunities for product issuer. In addition, the vast majority of overseas-listed actively managed ETFs are equity or fixed income ETFs with a simple investment strategy focusing on security selection.

8.The previous streamlined requirements provided exemptions only to passively managed master ETFs.

9.The previous streamlined requirements provided exemptions only to recognised jurisdiction schemes, managed by a management company in an acceptable inspection regime or schemes eligible under a mutual recognition of funds arrangement.