Tax-less ETF Trading in Hong Kong to Boost Volumes

In the recent Hong Kong budget, the government reinforced its commitment of making the country a viable place for financial markets as it waivers stamp duty on Exchange Traded Funds (ETFs), listed financial instruments. The move has been welcomed by industry participants as it will bolster trading activity in the basket instruments.

ETFs have been one of the fastest growing asset classes used by institutional and retail investors to gain exposure to a basket of instruments. Figures released by an industry research firm states that the assets held under management in ETFs grew by 28% in 2013, topping the previous $2.2 trillion figure. In addition, trading volumes were on the rise in 2013 with an uptake of 10% crossing the $15 trillion mark in turnover.

Hong Kong has witnessed exponential growth in terms of the number of ETFs issued and trading volumes, according to data on the government’s website the average trading volumes in 2013 were $3.7 billion with over 120 ETFs listed in the country. Asian ETFs have been outperforming their peers, recording a sharp rise in trading activity in 2013 with a jump of 103% in trading volumes, $654 billion in notional value.

Industry Professionals Hope for Further Growth of EFT Marketplace

Industry participants from across the board welcomed the recent government waiver, a spokesperson for Vanguard, a global investment management company, explained to Forex Magnates: “Vanguard welcomes the government’s proposed measures to further aid the growth and development of the ETF marketplace in Hong Kong."

"As a pioneer of low-cost investing, Vanguard is encouraged to see the proposed waiver as it further reduces the all-in-costs of investment. The more money investors can save in transaction costs, the more money they can earn with their investment,” the spokesperson added.

The country’s main exchange, where the funds are listed, was pleased with the government's amendments, Charles Li, CEO of Hong Kong Exchange and Clearing (HKEx) commented in a statement: “The proposals outlined will help enhance our securities market and sharpen our competitiveness. In particular, waiving the stamp duty on the trading of all ETFs will reduce the trading cost of ETFs with a higher percentage of Hong Kong stocks in their portfolios. We believe the proposal will help promote the development, management and trading of ETFs in Hong Kong and will benefit the overall development of the market."

Deltastock, a EU-based CFD broker, who offers a range of ETFs as a derivative also believes the new legislation will be a net positive. Andrey Stoychev, a dealer and financial analyst at Deltastock, stated in a comment to Forex Magnates: "ETF trading is very popular in all markets. When costs are lower, we will see larger volumes.”

CFD brokers have enhanced their product range to include ETFs, the product was launched in the mid 90’s when investors in the US looked for opportunities in a range of instruments. An ETF is an investment fund traded on a recognized exchange; it allows investors to take advantage of price movements in a basket of asset classes. Brokers such as DF Markets, Saxo and Plus500 allow traders to execute CFDs on ETFs through their trading platforms with the advantage of a margin product.

Vanguard’s spokesperson explained the benefits of ETFs: “ETFs can be used as part of a long-term investment strategy or as part of a short-term tactical allocation model. ETFs provide investors with flexibility, low costs, transparency and diversification.”

Mr. Stoychev believes that the value in ETFs is in their ability to diverse an investor’s portfolio, he explained: “One of the most important points of a trader’s portfolio is diversification. It can be done using low-cost, broadly diversified exchange-traded funds in each asset class. Actually, some of the main benefits associated with the ETFs are tax efficiency, transparency, Liquidity , cost efficiency, and diversification.”

Hong Kong has been battling with rival Singapore for its share of the FX and China business. Singapore recently overtook Japan as the largest FX market in Asia. According to the recent BIS survey, Hong Kong was the third most active jurisdiction in Asia with 4.1% market share.

Jeff Wilkins, Managing Director of Think Liquidity, commented about Hong Kong in a statement to Forex Magnates: “Hong Kong has always been an advanced jurisdiction for financial services, currently it acts as a bridge between China and the rest of the world. I think the changes in taxes on ETFs reinforce Hong Kong’s role as a regional global powerhouse.”