The world of cross-border exchange-traded funds (ETFs) has witnessed a notable divergence in performance this yearAs 2023 comes to a close, it’s clear that ETFs tracking the NASDAQ have emerged as frontrunners, delivering remarkable returns that stand in stark contrast to those focused on the Hong Kong market, which have consistently underperformed.

Data compiled by Tonghuashun indicates that as of December 20, several NASDAQ-focused ETFs, including the Credit Suisse NASDAQ ETF and the GF NASDAQ ETF, have recorded returns exceeding 50%. Meanwhile, the performance of Hong Kong stock-focused ETFs has been disheartening, showcasing an average drop that has left investors looking for answers amidst the decline.

The figures paint a clear picture of an 85% performance gap between the best and worst-performing cross-border ETFs

This stark contrast raises questions about market fundamentals and investor sentiment across different geographical regions.

As investors react to market fluctuations, a trend emerges where profitable ETFs experience significant cash withdrawals, while struggling funds attract new investments, illustrating a “buy the dip” mentalityThis trend is particularly evident in Hong Kong-themed ETFs, which, despite their poor performance, are now seeing increased interest from investors eager to capitalize on potential rebounds.

The overall growth of cross-border ETFs this year has been impressive, with total assets increasing by more than 50%. Market analysts predict that the performance divergence observed in 2023 will likely continue into 2024, as institutional investors remain cautious about market conditions.

Globally, stock markets have experienced varying degrees of performance

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While major indices in the US, Europe, Japan, and Southeast Asia have risen, Hong Kong’s market has lagged behind, leading to a varied performance landscape for cross-border ETFsThe disparity has raised discussions about the future of Hong Kong’s financial markets and their appeal to global investors.

Among the standout performers, the aforementioned NASDAQ ETFs have impressed, with some seeing increases as high as 56.45%. Investors have shown a clear preference for these funds, which have consistently outperformed their peers.

Notably, another 19 cross-border ETFs have exceeded a 20% return this year, including those tracking the S&P 500, as well as various sector-specific ETFs focused on Germany, Korea, and Japan

The performance of these ETFs signals a robust appetite for diversified international investments.

In stark contrast, domestic ETFs focused on the Hong Kong market have struggled, with nearly all displaying lossesThe lone exception has been the Hong Kong Dividend ETF, which managed a modest gain of 3.58%, while the Hang Seng Internet ETF recorded a significant decline of 27.55%, performing poorly relative to its cross-border counterparts.

As the year continues, different behaviors emerge among investors: a reluctance to let go of profitable investments is met with a counter-trend in purchasing those that are underperforming, indicating a blend of caution and opportunistic strategies among traders.

Despite the overall downcast sentiment in the Chinese market, cross-border ETFs have shown resilience, continuing to attract net inflows

The trend underscores an ongoing demand for investment opportunities outside domestic markets.

In terms of financial movement, net inflows into cross-border ETFs have reached an impressive 92.769 billion yuan this year, showcasing the attractive nature of these investment vehicles despite market challenges.

However, investor attitudes towards high-performing versus poorly-performing ETFs have diverged, with noticeable differences in cash flows, indicating a strategic approach to investment based on performance projections.

Interestingly, the ten cross-border ETFs with the highest net inflows this year are all based on Hong Kong stocks, primarily in sectors such as technology and pharmaceuticals

Despite the evident losses, these funds indicate a shift towards long-term recovery expectations by investment firms.

Among the cross-border ETFs that have seen significant asset growth, ones like the Hong Kong Innovation ETF and the Hang Seng Technology ETF have gained attention, suggesting investor belief in their future potential.

The Huitianfu NASDAQ Biotechnology ETF has recorded astonishing growth this year, with its scale multiplying more than six times and surpassing 500 million yuan in net inflowsThis ETF is recognized as China’s sole fund that tracks the US biotech innovation space.

Conversely, some top-performing ETFs have begun to hint at cash-out strategies as investors seek to realize profits amidst swirling market volatility.

The S&P 500 ETF has been highlighted as the cross-border ETF with the most substantial net outflows this year, exceeding 2.5 billion yuan, a surprising development given its upward trajectory

Other notable ETFs facing substantial outflows include those tracking the South Pacific low-carbon index.

Moreover, the successful NASDAQ and S&P 500 ETFs have witnessed a variety of asset reductions throughout the year, reflecting a pronounced tendency for profits to be taken off the table by investors eager to protect their gains.

In summary, the growth of cross-border ETFs has accelerated significantly.

The burgeoning market for cross-border ETFs is a response to the intensified efforts of Chinese management teams and the increasing desire among investors to access international opportunities

As a result, the number of cross-border fund offerings has expanded, meeting the needs for greater diversification and international exposure.

With cross-border ETFs increasingly becoming a vital segment of the investment landscape, fund companies have actively pursued new offeringsEarlier in the year, there was a noteworthy surge in products linked to the NASDAQ 100, followed by the introduction of Southeast Asia Tech ETFs, marking a significant evolution in ETF innovation.

Given the regulatory nature surrounding QDII quotas, opportunities for significant asset spread within fund companies remain limitedMoreover, this restriction allows new entrants to capitalize on learning opportunities to challenge established players, driving further demand for NASDAQ-themed ETFs, despite past market advantages held by large firms.

The compelling demand has made a noticeable impact, enabling Chinese investors to diversify their portfolios through cross-border ETFs, thus expanding their asset allocation horizon.

This asset class's ability to provide exposure across multiple global capital markets allows investors to explore comparative valuations, especially as macroeconomic conditions fluctuate globally.

With expectations rising that US Treasury yields might peak, a reassessment of risk assets has begun in earnest

Recent months have seen significant capital flowing into the Hong Kong market, a trend historically correlated with falling US Treasury yields, showcasing the market's responsiveness to global trends.

Since the beginning of the fourth quarter, there's been observable net inflow into various Hong Kong ETFs, hinting at bullish investor sentiment regarding a potential rebound in this beleaguered market sectorAnalysts posit that current valuations may sit near historic lows, creating appealing investment opportunities as economic positivity gradually recovers.

Internationally, the contrasting dynamics of capital allocation are evident; ETFs tracking the Nikkei index are experiencing growth across the board, driven by expectations of rapid recovery in the Japanese economy, offering favorable valuations relative to both European and US markets.