Exchange-Traded Funds in Hong Kong: Structure, Regulation, and the ETF Market

Introduction

Exchange-traded funds (ETFs) have become one of the most widely used investment vehicles globally, offering investors a liquid, transparent, and cost-efficient means of accessing a broad range of asset classes and investment strategies. Hong Kong has one of Asia's most developed ETF markets, with a growing range of products listed on the Hong Kong Stock Exchange (HKEX) spanning equity indices, fixed income, commodities, and — most recently — virtual assets. The introduction of the ETF Connect programme, which enables mainland China investors to access Hong Kong-listed ETFs and vice versa, has added a further dimension of strategic importance to the Hong Kong ETF market.

For fund managers considering the launch of an ETF in Hong Kong, and for institutional and retail investors evaluating ETF investments, understanding the regulatory framework, structural requirements, and market dynamics of the Hong Kong ETF market is essential. This article provides an overview of the key features of Hong Kong ETFs, with particular focus on the fund structure, SFC authorisation requirements, the ETF Connect programme, and the distinctive regulatory treatment of crypto ETFs.

What is an ETF?

An ETF is a collective investment scheme whose units are listed and traded on a stock exchange in the same way as shares in a company. Unlike conventional mutual funds, which are priced and traded once per day at the fund's net asset value (NAV), ETFs can be bought and sold throughout the trading day at market prices. The market price of an ETF is kept close to its NAV through the activities of authorised participants (APs) — typically large financial institutions — who can create and redeem ETF units in exchange for the fund's underlying assets through an in-kind creation and redemption mechanism.

ETFs may track an index (passively managed), pursue an active investment strategy (actively managed), or use derivative instruments to provide leveraged or inverse exposure to an underlying index or asset class. In Hong Kong, the vast majority of listed ETFs are passively managed index-tracking funds, although active ETFs and strategy ETFs are also available.

SFC Authorisation for Hong Kong ETFs

ETFs listed on HKEX that are offered to retail investors must be authorised by the Securities and Futures Commission (SFC). The SFC has issued the Code on Unit Trusts and Mutual Funds (the UT Code) and a specific set of Guidelines for ETFs (the ETF Guidelines), which set out the requirements applicable to ETF structure, management, disclosure, and ongoing compliance.

Eligible Structures

ETFs listed in Hong Kong are typically constituted as unit trusts, although the SFC also accepts OFC (open-ended fund company) structures and, in certain cases, foreign fund structures. The unit trust structure is the most common, with the ETF constituted under a trust deed with an SFC-approved trustee acting as custodian of the fund's assets.

Management Company Requirements

The management company of a Hong Kong ETF must be licensed by the SFC to conduct Type 9 regulated activity (asset management) and must have the relevant resources, expertise, and systems to manage the fund. The management company must also demonstrate to the SFC's satisfaction that it has the operational infrastructure to manage the creation and redemption mechanism — a distinctive feature of ETF management that requires specific expertise.

Index Requirements for Index-Tracking ETFs

For index-tracking ETFs, the SFC has specific requirements relating to the underlying index. The index must be transparent, based on objective criteria, and developed and administered by a reputable index provider. The SFC's requirements also address concentration risk, liquidity of constituent securities, and the frequency of index rebalancing.

Derivative-Based and Leveraged/Inverse ETFs

ETFs that use derivatives to achieve their investment objectives — including leveraged ETFs (which aim to deliver a multiple of the daily return of an index) and inverse ETFs (which aim to deliver the inverse of the daily return of an index) — are subject to specific additional requirements under the ETF Guidelines. These requirements address the complexity and risk of these products and impose disclosure obligations designed to ensure that retail investors understand the distinctive characteristics and risks of leveraged and inverse ETFs, including the effect of daily compounding on longer-term returns.

The ETF Connect Programme

The ETF Connect programme, launched in July 2022, allows mainland China investors to purchase eligible Hong Kong-listed ETFs through the northbound leg of the scheme, and Hong Kong investors to purchase eligible mainland-listed ETFs through the southbound leg. ETF Connect is an extension of the existing Stock Connect programme and operates through the same clearing and settlement infrastructure.

Eligible ETFs for northbound trading (Hong Kong ETFs accessible to mainland investors) must meet specific eligibility criteria, including minimum AUM thresholds, minimum average daily trading volume requirements, and tracking index requirements. Similarly, eligible ETFs for southbound trading (mainland ETFs accessible to Hong Kong investors) must meet criteria set by the China Securities Regulatory Commission (CSRC).

ETF Connect significantly expands the investor base accessible to Hong Kong ETF managers, potentially giving eligible Hong Kong-listed ETFs access to the enormous retail and institutional investor market in mainland China. This has been a major driver of interest in establishing ETFs in Hong Kong.

Crypto ETFs: Bitcoin, Ether, and Beyond

Hong Kong made significant regulatory history in 2022 and 2024 with the SFC's authorisation of crypto ETFs. The first Bitcoin futures ETF was listed on HKEX in October 2022, followed by Ether futures ETFs. In April 2024, the SFC approved the listing of spot Bitcoin and Ether ETFs — products that hold actual Bitcoin and Ether rather than futures contracts.

The listing of spot crypto ETFs in Hong Kong was widely seen as a landmark development, distinguishing Hong Kong from jurisdictions (including the United States at that time) that had not yet permitted spot crypto ETFs for retail investors. Crypto ETFs listed in Hong Kong must comply with additional disclosure requirements and risk management measures designed to address the distinctive risks of virtual asset investments, including high price volatility, liquidity risk, and custody risk.

Ongoing Compliance and Reporting

SFC-authorised ETFs must comply with ongoing reporting obligations, including the publication of annual and semi-annual reports, daily disclosure of the ETF's portfolio composition files (PCFs), and notification of material changes to the fund's structure or investment strategy. The PCF is a distinctive disclosure requirement for ETFs — it lists the composition of the basket of securities (or other assets) that APs use in the creation and redemption process, enabling APs and market makers to calculate the fund's intra-day indicative NAV and manage their arbitrage activities effectively.

Conclusion

Hong Kong's ETF market offers a well-regulated, liquid, and internationally connected platform for fund managers seeking to list ETFs in Asia. The SFC's authorisation framework provides a robust regulatory foundation, ETF Connect links Hong Kong-listed products to the mainland China investor base, and the recent approval of crypto ETFs demonstrates the SFC's willingness to embrace innovative products within a regulated framework.

For fund managers considering ETF launches in Hong Kong, engaging experienced fund formation counsel and regulatory advisors is essential to navigating the SFC authorisation process efficiently and structuring the fund in a way that meets both regulatory requirements and commercial objectives.