ETF Cross-Listing: Embracing a Blue Ocean

The market performance of two Saudi ETFs has to some extent reflected investors' demand for allocating and trading overseas assets through ETF mutual listing services. Under the policy backdrop of "expanding openness," based on the reality that the Shanghai and Shenzhen stock exchanges have signed cooperation memoranda with dozens of foreign institutions, and public fund institutions have dozens of overseas subsidiaries, this business has great potential to be tapped.

The listing performance of the two Saudi ETFs has become one of the biggest highlights in the ETF market recently.

Data from East Money Choice shows that as of July 30, the turnover rates of the Southern Saudi ETF (159329.SZ) and Huatai-Pine Rich Saudi ETF (520830.SH) since their listing on July 16 were 91.77% and 293.26%, respectively, with amplitudes reaching 30.31% and 30.38%, ranking in the top two among the 917 listed ETFs.

As an ETF mutual listing product, the above market performance has to some extent reflected investors' demand for allocating and trading overseas assets, and also reflected the results of the regulatory authorities' efforts to "deepen reforms and expand openness."

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According to information on the official websites of the China Securities Regulatory Commission (CSRC) and the Shanghai and Shenzhen stock exchanges, as of the end of July, the two major exchanges have signed cooperation memoranda with at least 58 foreign institutions. At the same time, there are at least 29 overseas subsidiaries established by mainland public fund institutions in Hong Kong, Singapore, the United States, and other places.

However, at present, there is only one public fund institution's overseas subsidiary, Southern Fund's subsidiary Southern Dongying, that has carried out ETF mutual listing business, and there are less than 10 pairs of ETF mutual listing products.

According to data from ETFGI, a European ETF research institution, as of the end of June, there were 12,420 ETFs globally, with a total scale of $13.14 trillion, mainly listed on 80 exchanges in 63 countries or regions.

Therefore, despite some constraints, under the policy backdrop of "deepening reforms and expanding openness," the ETF mutual listing business may still become a blue ocean.

According to an article published on the official website of the CSRC on July 26, when CSRC Chairman Wu Qing recently held a special discussion with foreign institutions, he pointed out: "We will always adhere to the direction of marketization and legalization, unswervingly deepen reforms and expand openness... We hope that relevant foreign institutions will leverage the advantages of international investment banks and institutions, adhere to long-termism, play the role of a communication bridge with the global market, and tell the Chinese story well."

Saudi ETFs are sought after.Let's start with the recent standout performance of the Saudi ETFs.

In September and December 2023, the Shanghai Stock Exchange and Shenzhen Stock Exchange respectively signed a memorandum of cooperation with the Saudi Exchange Group (referred to as Saudi Exchange) in Riyadh, the capital of Saudi Arabia. According to the memorandum, the Chinese and Saudi sides will explore cooperation opportunities in financial technology, ESG, data exchange, and research. They will jointly study the promotion of cooperation in products such as indices, funds, and REITs, and explore the interconnection of ETFs and cross-listing of listed companies.

Subsequently, in December 2023 and March of this year, Huatai-PineBridge and Southern Fund respectively applied for a QDII-ETF product with the Southern Eastern Saudi ETF as the investment target. Both were approved on June 12, launched on June 24, established on July 5, and listed on the Shanghai and Shenzhen Stock Exchanges on July 16.

As of July 30, the share scale of Huatai-PineBridge Saudi ETF and Southern Saudi ETF were 931 million shares and 953 million shares, respectively, increasing by 57.80% and 50.32% compared to the time of establishment. Based on the closing price on that day, the IOPV premium rates of the two ETFs were 1.53% and 4.79%, respectively.

The "Listing Trading Announcement" shows that foreign institutions and private equity funds have shown great interest in the above two products.

The Hong Kong and Shanghai Banking Corporation and Barclays Capital are the largest holders of Huatai-PineBridge Saudi ETF, holding 12.11% of the shares. The Hong Kong and Shanghai Banking Corporation is also the largest holder of Southern Saudi ETF, holding 11.36% of the shares. The four FOFs managed by Beijing MSCI Dongcheng Private Equity Fund Management are the third, fourth, seventh, and eighth largest holders of Huatai-PineBridge Saudi ETF, holding a total of 6.91% of the shares. There is also one FOF that is the third largest holder of Southern Saudi ETF, holding 1.54% of the shares.

The "Listing Trading Announcement" also shows that 46.25% and 82.26% of the shares of the above two ETFs are held by institutional investors.

However, it should be pointed out that the above two ETFs do not directly invest in the Saudi index, but indirectly invest in Saudi assets by investing in the Southern Eastern Saudi ETF (2830.HK). Therefore, the above two ETFs are essentially a type of ETF feeder fund.

The establishment of Southern Eastern ETF is the result of the cooperation plan between the Hong Kong Stock Exchange and Saudi Exchange. In February 2023, the two sides signed a memorandum of cooperation, expressing the intention to explore cooperation opportunities in the fields of financial technology, ESG, and mutual listing.

Nine months later, Southern Eastern Saudi ETF was listed, with the FTSE Saudi Arabia Index (Net Total Return) as the investment target, becoming the first ETF in the Asia-Pacific region to track this index.According to the official website of FTSE Russell, the aforementioned index was launched in March 2019, with 62 constituent stocks covering 11 industries (ICB industry classification). As of the end of June, the market capitalization was $324.9 billion, with the annualized return rates (in US dollars) for the past three years and the past five years (as of the end of June) being 4.40% and 7.50%, respectively.

ETF Interlisting

Unlike ordinary QDII-ETFs and ETF feeder funds, the two Saudi ETFs mentioned above are also the result of the ETF interlisting program.

The term "ETF interlisting" currently has no official definition. It generally refers to the cross-border ETFs that are listed on exchanges with cooperative relationships, targeting each other's listed ETFs as investment objects. For example, the domestic exchange lists ETFs that target specific overseas ETFs as investment objects (usually requiring QDII qualification), while the overseas cooperative exchange lists ETFs that target specific domestic ETFs as investment objects (usually requiring RQFII qualification).

Taking the two Saudi ETFs as an example, their investment target is the Southern Eastern Saudi ETF listed on the Hong Kong Stock Exchange. In exchange, the Hong Kong Stock Exchange also lists two cross-border ETFs targeting domestic ETFs, such as the Southern Eastern Huatai-Ping An CSI 300 ETF (3133.HK) listed on July 16.

Historically, the ETF interlisting business between domestic exchanges and the Hong Kong Stock Exchange began on October 23, 2020. On that day, the Shenzhen Stock Exchange and the Hong Kong Stock Exchange signed a cooperation memorandum to jointly promote the ETF interlisting program and launched two ETF interlisting products on the same day. Among them, Harvest Hang Seng China Enterprises ETF (159823.SZ) and Silver Hua Industrial Bank Southern Eastern Standard & Poor's China New Economy Industry ETF (159822.SZ) were listed on the Shenzhen Stock Exchange, while Hang Seng Harvest CSI 300 Index ETF (3130.HK) and Southern Eastern Silver Hua China Securities 5G Communication Theme ETF (3193.HK) were listed on the Hong Kong Stock Exchange.

On June 1, 2021, the Shanghai Stock Exchange and the Hong Kong Stock Exchange also launched a pair of ETF interlisting products. Among them, the Shanghai Stock Exchange listed the Huatai-Ping An Southern Eastern Hang Seng Technology ETF (513130.SH), and the Hong Kong Stock Exchange listed the Southern Eastern Huatai-Ping An CSI Photovoltaic Industry ETF (3134.HK).

In addition to the Hong Kong Stock Exchange, domestic exchanges have also reached an ETF interlisting cooperation with the Singapore Stock Exchange. On December 1, 2023, the first pair of interlisted products were listed, namely the Huatai-Ping An Southern Eastern SGX Pan-Southeast Asia Technology ETF (513730.SH) listed on the Shanghai Stock Exchange, and the Southern Eastern Huatai-Ping An Shanghai Dividend ETF (SHD.SI) listed on the Singapore Stock Exchange.

The former invests in the Southern Eastern SGX Pan-Southeast Asia Technology ETF, while the latter tracks the SGX Pan-Southeast Asia Technology Index, which has 30 constituent stocks from countries such as Singapore, Indonesia, Thailand, Vietnam, Malaysia, and India.

A Blue Ocean

[Note: The translation ends abruptly, and the original text seems to be cut off. The last sentence "一片蓝海" translates to "A Blue Ocean," which typically refers to a market space where competition is minimal and there is significant potential for growth. However, without the full context, it's unclear how this phrase fits into the discussion.]The aforementioned domestic (or Hong Kong) listed ETF mutual linking products are essentially indirect investments in overseas (or domestic) capital markets through investments in ETFs under Southern East England. Southern East England is not the only branch established overseas by public fund institutions.

According to the official website of Southern Fund, Southern East England is the first subsidiary established overseas by a domestic public fund institution, established in Hong Kong in January 2008, with Southern Fund holding a 52.5% stake. As of the end of 2023, Southern East England has issued a total of 45 ETP products (including ETFs and leveraged and inverse products) and 3 mutual products in the Hong Kong and Singapore markets, with total assets under management exceeding $14.7 billion.

In fact, in addition to Southern East England, there are at least 25 fund companies that have established asset management subsidiaries in Hong Kong, including Easy Fund, Huaxia, Huitianfu, Dacheng, Bosera, Guangfa, ICBC Credit Suisse, Yinhua, and Fu Guo. Looking at the time when the China Securities Regulatory Commission (CSRC) approved the establishment of subsidiaries, 2, 3, 5, 3, 2, and 2 were approved from 2008 to 2013, respectively, 3 were approved in 2015, and 1 was approved each year from 2019 to 2023.

In addition, in April and July 2021, the CSRC successively approved the establishment of asset management subsidiaries by Bank of China Fund and Huitianfu in Singapore and the United States, respectively. In March 2023, Huitianfu was approved to establish an asset management subsidiary in Singapore.

Furthermore, according to the official website of the Shanghai and Shenzhen stock exchanges, as of the end of July, at least 58 cooperation memoranda have been signed with overseas institutions.

Therefore, under the policy background of "deepening reform and expanding openness," the combination of the above two factors (the existence of dozens of public fund institutions' overseas subsidiaries and the signing of memoranda of understanding between the Shanghai and Shenzhen stock exchanges and dozens of overseas institutions) is entirely possible to produce a huge chemical reaction.

According to the official website data of ETFGI, a research institution overseas, as of the end of June, the global ETF scale was $13.14 trillion, with a compound annual growth rate of 16.80% over the past 10 years. These ETFs come from 758 asset management institutions and are mainly listed on 80 exchanges in 63 countries or regions. Among them, data from the United States also show that as of the end of June, global ETFs have maintained net inflows for 61 consecutive months, with inflows of $730.36 billion from January to June 2024, the highest on record (for a half-year), of which stock ETFs inflow $410.33 billion.