HSVM: ETF market needs policy boost to unlock growth

The slower growth suggests untapped potential in a market already recognised for its liquidity, regulatory framework.

Hong Kong’s exchange-traded fund (ETF) market has significant room to grow and could benefit from policy and structural enhancements to better compete with regional peers, according to a new research paper published by Hang Seng Investment Management Limited (HSVM).

The report, Catalysing Growth: Understanding Hong Kong’s ETF Market Landscape, highlighted that whilst Asia-Pacific’s ETF market recorded a compound annual growth rate (CAGR) of 22% over the past decade, Hong Kong’s ETF market expanded at a more modest 5% CAGR.

This slower growth, the paper argues, suggests untapped potential in a market already recognised for its liquidity, regulatory framework, and role as a bridge between mainland China and global investors.

At the macro level, HSVM proposes integrating indexed ETFs into the Mandatory Provident Fund (MPF) Default Investment Strategy with life-cycle investment tiers.

It also recommends the introduction of tax-deductible quotas for long-term ETF investments under schemes like the QDAP and TVC. With an annual cap of $120,000, these incentives could channel an estimated $12b in assets under management (AUM) into the ETF sector.

On a structural level, the paper calls for incentives to improve market maker participation and suggests accelerating the digitisation of ETF creation and redemption processes to improve market efficiency.

To increase retail participation, the report urges stronger financial literacy efforts and standardised ETF product disclosures. It also encourages product innovation to align with evolving investor needs and global trends.

HSVM, which is the largest ETF manager in Hong Kong in terms of AUM, says the combination of regulatory reform, market infrastructure upgrades, and investor education could help position the city as a regional ETF powerhouse.