Leveraged ETFs expected to return: SGX

Published: 23.10.2018 Related countries:  Singapore Singapore

Such products are popular elsewhere but concerns remain here about investor suitability

LEVERAGED and inverse exchange traded funds (ETFs) could make a comeback on the Singapore Exchange (SGX) in the second quarter of this year, but some fund issuers are taking a cautious approach amid concerns about investor suitability.

Luuk Strijers, head of products for SGX's equities and fixed-income business, told The Business Times that products with such structures are expected in the coming quarter, but he declined to disclose their underlyings.

If they come to market, they will be the first in Singapore in about nine years; when the global financial crisis happened, it snuffed out regulator approval and investor appetite for exotic products.

But leveraged products have been gaining popularity in other parts of the world over the last few years, especially among high-frequency traders. Last year, the Monetary Authority of Singapore issued guidelines on the circumstances under which leveraged and inverse ETFs could be traded on the exchange, opening the doors for issuers to create new products for listing. Those guidelines include avoiding calling them ETFs to prevent confusion from plain-vanilla funds, and to clearly market those products on trading screens.

Whether the new products will be as popular in Singapore as in some other regional markets - leveraged ETFs account for more than half of ETF volumes in Taiwan - remains to be seen. One hurdle, however, is that they are considered "Specified Investment Products" in Singapore, which means that they are deemed unsuitable for retail investors.

Mr Strijers said: "The success of the products are dependent on many factors... One of the differences, however, lies in the fact that leveraged and inverse ETFs will be classified as Specified Investment Products (SIP), a Singapore regulatory requirement that limits access to only SIP-qualified investors."

This classification is not without reason. Leveraged ETFs in particular are unsuitable for holding long-term, like their plain-vanilla counterparts; this is because they are reset daily, which disconnects them from the underlying indices over long durations, especially if the underlying index is volatile. For example, a two-times fund linked to the Straits Times Index (STI) is unlikely to offer a two-time return over the actual STI over one year because the leveraged fund's performance on each day is compounded over the duration that the fund is being held.

Nikko Asset Management head of international product Phillip Yeo said: "We have concern at this point in time about leveraged and reverse ETFs because of the compounding effect. My biggest fear is that if you don't explain it clearly, there's a big chance of misunderstanding the product.

"We're watching the space, we're not saying no, but we want to make sure investors who buy our products understand them."

Marco Montanari, head of Asia-Pacific passive asset management at Deutsche Asset Management, said local-index linked products are likely to do better for now. "But in order to have a larger growth, the Asian ETF markets need to evolve into a structure that is more similar to the US or European or even Australia ETF markets," he said. "In these exchanges, investors use ETFs to acquire international exposure (and not just local exposure) and also fixed income access (and not just equity)."