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Guide to ETFs
Your IndustryOct 29 2015

Impact of slowdown in China on ETFs

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Vivian Tung, vice president for product strategy and Global ETF product at Brown Brothers Harriman, says her company worked with CSOP Asset Management to launch the first US ETF by a Chinese asset manager without a partnership with a US sponsor.

With the slowdown in China however, Ms Tung says she anticipates a decrease in new market entrants and product launches until the sentiment in China recovers.

“Many of the existing Chinese based ETFs prior to slowdown saw very large performance returns,” she says. “However, there has been somewhat of a correction with the market, thus, for an individual investor the impact is dependent on when they purchased the ETF.”

Recently there has been much discussion around the impact for investors arising from the slowdown in China.

Townsend Lansing, head of short/leveraged and FX platforms at ETF Securities, says investors in industrial metals will be aware that there has been a historic link between Chinese GDP growth and its consumption of metals.

However, Mr Lansing says this year we have seen a change in this trend, which has not yet translated across to pricing in the industrial metals market.

Mr Lansing says: “The speculation of falling demand coupled with economic data significantly missing expectations has fuelled negative sentiment around industrial metals leading to a volatile investment environment.

“This volatility is not unique to industrial metals. In the past few weeks alone, we have seen major indices across different asset classes move 1 to 2 per cent per day,” he says, adding that advisers need to acknowledge volatility can also provide opportunities.

While a falling manufacturing PMI typically leads to outflows from long industrial metal ETFs, Mr Lansing says there tends to be an increase in demand for short industrial metal ETFs and vice-versa.

The key is the ability to be able to respond to the market conditions, he says.

Like all investors, Mr Lansing says ETF investors will feel the impact of the movement of indices across the asset class of their underlying investment, but will be able to react quickly due to the ability to trade throughout the day and access liquidity due to the secondary layer of liquidity provided by the market makers as well as willing buyers and sellers on the secondary market.

According to ETFGI, US$32bn flowed into ETFs in September, an indication that investors continue to use ETFs in the wake of the Chinese slowdown in August.

Mr Lansing says: “Volatile markets provide investors with ample opportunities but also heightened risks so it is essential that investors consider which access point is most appropriate on an individual basis.”

Christopher Mellor, head of equity product management at Source, says the Chinese market turmoil over the summer has had knock on impacts across global markets, affecting all kinds of investment vehicles, including ETFs.

Mr Mellor says investors with direct exposure to China have obviously seen significant declines in asset values over the summer, but these followed a prolonged period of rising prices.

An investor in the CSOP Source FTSE China A50 Ucits ETF who bought at the end of September 2014 would have had a total return of 25 per cent on their investment, Mr Mellor says, adding that one of the advantages of ETFs is the ability to buy or sell easily on exchange, with many investors taking advantage of this with regard to China ETFs.

But Mr Mellor says advisers should note that none of the European listed China ETF products saw an interruption to trading, even during the height of the China market turmoil.