What Are Cross-Listed ETFs? How Does the Cross-Listing Mechanism Work?

Cross-listed ETFs are products under the ETF Cross-listing Scheme between Hong Kong and the mainland: asset managers on both sides establish products in a master-feeder structure, with locally listed feeder ETFs investing at least 90% of net assets in a single target ETF (the master fund) listed in the other market, giving investors on each side the same index exposure as the other market's ETF through a locally listed product. The first batch of cross-listed products listed simultaneously in Hong Kong and Shenzhen on October 23, 2020.

1. Official mechanism and launch

First-batch products: On October 23, 2020, the first four products under the ETF Cross-listing Scheme listed simultaneously on both sides: the Harvest HSCEI ETF and the Yinhua ICBCCS CSOP S&P China New Economy Industry ETF on the SZSE; and the CSOP Yinhua CSI 5G Communication Theme ETF and the Hang Seng Harvest CSI 300 Index ETF on HKEX.

Regulatory approval on both sides: Hong Kong products are authorized by the SFC, mainland products are registered by the CSRC, and the two exchanges signed a memorandum of understanding to jointly promote the ETF cross-listing scheme.

2. The master-feeder structure

At least 90% invested: Mainland cross-listed ETFs adopt the QDII (Qualified Domestic Institutional Investor) regime, investing at least 90% of fund net assets in a single SFC-authorized, SEHK-listed target ETF; Hong Kong cross-listed ETFs invest 90% or more of total net assets via the RQFII (RMB Qualified Foreign Institutional Investor) channel in a single SZSE-listed target ETF.

NAV linkage: The bulk of the feeder fund's assets moves with the master fund's NAV, so the performance of the two products is highly correlated, differing mainly at the level of FX, fees, and premium/discount.

3. Channel differences by direction

QDII and RQFII: Mainland products access Hong Kong master funds through the QDII channel; Hong Kong products access mainland master funds through the RQFII channel, each drawing on its corresponding cross-border investment quota.

4. The trading path for investors

On-exchange trading in the local market: Mainland investors buy and sell cross-listed ETFs on-exchange in RMB on mainland exchanges; Hong Kong investors trade the corresponding products on HKEX in HKD (or via RMB counters), each product trading under the local rules of its exchange.

5. The boundary with ETF Connect (drawn first)

Two mechanisms: Cross-listing is a product-level cross-border arrangement in which purpose-built feeder products are traded; ETF Connect (ETF Connect) is a mechanism-level expansion of Stock Connect eligibility, allowing direct trading in the other exchange's native ETFs. A dedicated comparison article covers the distinction.

NewTimeSpace Observation: The master-feeder structure lets investors obtain the other market's index exposure in a locally listed product form, with convenience and cost coexisting: dual-layer fees, FX, and tracking deviation are factors to weigh against direct channels when choosing cross-listed products.

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