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ETF strategies to manage market volatility
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Money managers and institutional investors are re-evaluating investment strategies in the face of rapidly shifting market conditions. Consequently, selective genres of exchange-traded funds (ETFs) are seeing robust growth in assets. Hong Kong Exchanges and Clearing (HKEX) explores the top product trends in the ETF market emerging from recent market volatility
![AETFF_2019](/sites/default/files/styles/free_crop/public/2019-06/AETFF_2019.jpg.webp?itok=uzmOKtwT)
The inverse universe
Inverse products are increasingly used by investors to capture opportunities and manage risks during market downturn.
![AR1019HKEX_fig1](/sites/default/files/styles/square_400/public/2019-10/AR1019HKEX_fig1.jpg.webp?itok=C0i9FHMt)
The inverse products market is fast expanding due in part to recent market volatility. In Hong Kong, the monthly average daily turnover (ADT) of inverse products surged more than 141% in one month to HK$783 million in August 2019, pushing the monthly ADT of leveraged and inverse products (L&I products) to a record high of HK$1 billion (see figure 1).
Investors have shown a preference for higher leverage multiples – especially when volatility spikes. In August, when deepened trade tension had a conspicuous impact on equity markets, -2x inverse products accounted for 57.2% of total ADT in Hong Kong‑listed L&I products, and two out of the five most actively traded L&I products in terms of ADT were -2x inverse products (see table).
![AR1019HKEX_fig2](/sites/default/files/styles/free_crop/public/2019-10/AR1019HKEX_fig2_0.jpg.webp?itok=Q1qokEi6)
Compared with other derivatives products, L&I products offer a higher degree of flexibility. Melody He, managing director at CSOP Asset Management, notes: “Many institutions have mandates that restrict them from using derivatives; the operational and risk management costs associated with derivatives trading are also quite high. Therefore, institutions are increasingly using -2x inverse products to hedge the market. Not only is the settlement the same as stocks, but clients investing in the exchange-traded product do not need to worry about monthly rolling, margin calls, collateral and extra transaction costs/slippage.”
“Typically, institutions use -2x inverse products tactically to express their views. For example, a -2x inverse product benchmarked against the Nasdaq Index might be used to hedge risk before the market opens in the US,” she says.
-2x inverse products were introduced to Hong Kong investors six months ago after the Securities and Futures Commission approved a rule change to expand the multiples of inverse products. In response to growing investor interest, two new -2x inverse products were launched in September, both benchmarked against a major US equity index.
Shifting investor preference
Unstable market conditions have been driving capital to fixed income. Globally, fixed income products are the most popular type of ETF, collecting US$59.5 billion in the second quarter of 2019, according to BlackRock. Meanwhile, commodities ETFs are another area to watch for potential gains and rebalancing opportunities. As demand for safe-haven assets increases, gold prices have surged 17%1 year-to-date, outperforming other asset classes. Owing to rising gold prices and capital inflows, the market cap of gold ETFs listed in Hong Kong grew more than 36% since the start of the year to HK$1.1 billion at the end of August.
Notes
1. Bloomberg, as of September 18, 2019
Investors should note that exchange-traded products can include counterparty risk, market risk, tracking errors, trading at discount or premium and liquidity risk. They should also understand how the performance of L&I products is likely to be affected when they are held for more than one trading day, as there will be a compounding effect. Learn more about exchange-traded products.
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