Tracker Fund still popular 20 years after Hong Kong government created ETF to dispose of shares bought during 1998 crisis

Enoch Yiu

The popularity of Tracker Fund, Hong Kong’s first exchange trade fund has made the stock exchange Asia’s fifth-largest ETF market, which can be further boosted by a “connect” to allow cross border trading of the index funds, according to market observers.

Hong Kong Exchanges and Clearing on Tuesday will mark the 20th anniversary of the Tracker Fund – the first ETF to be listed on the stock exchange. Now 119 ETFs manage assets worth US$37 billion, according to Bloomberg data as of Friday, with Japan way ahead at US$391 billion, followed by mainland China at US$78 billion, Taiwan at US$51 billion and South Korea at US$40 billion.

Christine Lin, partner at financial services firm EY, said since the ETF market has developed well over the past two decades, Hong Kong and China should launch a “connect for cross border trading of ETFs to further boost ETFs in Hong Kong”.

An “ETF connect” was supposed to be the fourth scheme linking Hong Kong and the mainland after the stock connect with Shanghai in 2014, followed by Shenzhen in 2016 and the bond connect allowing northbound trading in 2017. However, the plan was shelved because of difficulties in trading and settlement of ETFs between Hong Kong and the two mainland markets.

Ray Chan Chun-man, head of SPDR ETFs Hong Kong at State Street Global Advisors, says investors are happy with returns provided by the fund. Photo: Xiaomei Chen

The Securities and Futures Commission chairman Tim Lui last year said the focus would now be on the launch of cross listing of these index funds, but there is no definite timetable to execute the plan. In June, Beijing started a cross listing programme with Japan, allowing four funds each from China and Japan to cross list on their respective bourses.

“Going forward, if we can initially have cross listing of ETFs between Hong Kong and the mainland and then further develop it into a full scale ETF connect, it will be a big boost to the index fund market in Hong Kong,” Lin said.

The Tracker Fund was created for the Hong Kong government to dispose of its HK$118 billion (US$15 billion) stock portfolio bought during the market intervention in 1998 to drive away speculators who tried to attack the currency peg. The fund, inspired by the SPDR ETF launched in the US in 1993 by State Street Global Advisors, tracks the constituent stocks of the Hang Seng Index, while allowing investors to trade units of the ETF like any other stock.

The IPO of Tracker Fund raised HK$33.3 billion, which was the largest IPO in Asia excluding Japan at the time. It attracted 184,000 Hong Kong investors to buy the unit at HK$12.88. After discount, their buying price was only HK$11.5 while the price had more than doubled to HK$27.8 as of last Friday.

“Some investors often tell me that they still hold the fund which they bought in 1999,” said Ray Chan Chun-man, head of SPDR ETFs Hong Kong at State Street Global Advisors, which manages the Tracker Fund.

He said the fund is popular because it is simple, diversified and low cost. “It is an index fund, so the ongoing charges includes a management fee of only about 0.09 per cent, lower than most actively managed fund of about 1.5 per cent.”

Norman Chan Tak-lam, former chief executive of Hong Kong Monetary Authority, said holders of the Tracker Fund since the IPO will have made annualised returns of 7.6 per cent. Photo: Jonathan Wong

Holders of the Tracker Fund since the IPO will have made annualised returns of 7.6 per cent, Norman Chan Tak-lam, former chief executive of Hong Kong Monetary Authority, wrote in an article before his retirement in September.

He recalled how the government was grappling to dispose of the shares bought during the market intervention.

“It quickly became obvious to me that an open-ended ETF that tracked the HSI would be an innovative and neat solution to our problem. Contrary to conventional disposal methods, the purchase of a basket of shares that replicated all the stocks in the index would unburden one from the difficult task of choosing the right stocks and the right timing to buy,” Chan wrote.

The government sold a total of HK$140.4 billion as part of the Tracker Fund IPO and follow-up disposals while it still has HK$51.3 billion as a long-term investment.

State Street’s Chan said that the company has been working with Mandatory Provident Fund providers to use the Tracker Fund as an investment fund choice for employees. Currently, there are eight providers with 12 MPF fund choices investing in the ETF.

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