Singapore Readies New Exotic ETFs to Catch Taiwan, Hong Kong

Preparations are underway in Singapore for the first new listing of leveraged and inverse exchange-traded funds in almost eight years.

Singapore Exchange Ltd. last week published a new web page about the products, described as “a form of passive collective investment schemes (like ETFs) and structured as open-end funds,” following revised guidelines from the Monetary Authority of Singapore in August.

Singapore, along with Hong Kong, is seeking to capture a bigger share of an expanding pie through types of funds that have seen success in Japan, Taiwan and Korea. Leveraged ETFs in Taiwan, which started in 2014, now have more than $4.8 billion in assets, according to data compiled by Bloomberg. Daily trading of inverse and leveraged funds is more than half of Taiwan’s ETF market, said Andy Chang, president and chief executive officer of Cathay Securities Investment Trust Co.

“The MAS indicated its openness to leveraged and inverse ETFs in Singapore last year,” said Jek-Aun Long, a partner at law firm Simmons & Simmons JWS. “We are involved in several such products in the pipeline -- we can expect exciting things in the coming months.”

MAS does not comment on its dealings with financial institutions and other entities, it said in a reply to queries.

Read more: This week’s ETFs Brief

A leveraged ETF uses derivatives and debt to amplify the returns of an underlying index, while an inverse fund offers a way to profit from falling markets. Firms in Hong Kong are eyeing a March start for the products linked to popular local gauges such as the Hang Seng Index, Bloomberg news reported last week. The Asian ETF market is expected to grow 18 percent a year over the next five years, a report from PricewaterhouseCoopers LLP said.

“Due to the amplifying or inverse setup of these products, they have gained popularity in various markets, including Asia,” said Luuk Strijers, director and head of products at SGX. “Issuers have seen these products successfully take off in markets such as Japan and Taiwan and see the potential especially when using local indices as underlyings which are open for trading during Asian hours.”

No Issues

Singapore listed the first inverse ETF in Asia in 2009, but there have been no new issues since, amid consumer protection fears. The db x-trackers S&P 500 Inverse Daily UCITS ETF provides gains when the S&P 500 index falls.

Under the recent MAS guidelines, leveraged and inverse products are classified as specified investment products and require investors to show they have substantial financial knowledge either through a finance-focused university degree, professional experience or by passing an online test.

Singapore’s rules allow listings that offer leverage or inverse exposure to local or foreign indexes except shorting China with regulatory approval. Hong Kong approved the ETF types for offshore indexes in February 2016 and for domestic indexes in December. While Singapore is open to leverage of three times or more but requires issuers to consult it in advance, Hong Kong has a two-times limit.

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“Singapore is on our radar screen for leveraged and inverse ETFs,” said William Chow, managing director at Value Partners Ltd. in Hong Kong. “We are having a close dialog with SGX.”

(A previous version of this story corrected the reference to Simmons & Simmons Joint Law Venture.)