The Resonance Between Derivatives and ETFs
The global capital markets in 2025 are witnessing a 'expectations gap' correction that is poised to upend all investors' entrenched perceptions.
01
Correction of the Expectations Gap: The 'Historic Return' of Liquidity in Hong Kong Stocks
While most investors remain fixated on the Nasdaq and S&P 500, Hong Kong stocks have already made a near 'preemptive' transition from a valuation trough to a liquidity peak.
As of November 27, the Hang Seng Index has risen 29.34% year-to-date, while the Hang Seng Tech Index has climbed 25.29%, both outperforming core U.S. equity indices.
More crucially, this rally is not driven by sentiment but is underpinned by a structural increase in liquidity. According to Wind data, as of November 27, the average daily turnover of the Hang Seng Index rose to HKD 256.125 billion, marking the highest level since 1969. Similarly, the average daily turnover of the Hang Seng Tech Index reached HKD 79.025 billion, setting a new high since its inception.
Hong Kong stocks have exited the 'low-liquidity zone' and entered a true 'high-activity era'.
The substantial inflow of capital has been the key variable driving this market trend. Mainland funds have continuously flowed into Hong Kong stocks via the Stock Connect and ETF channels. As of November 27, southbound funds recorded a net inflow of HKD 1,379.185 billion for the year, setting an annual record since the launch of Stock Connect. Meanwhile, mainland ETFs eligible to invest in Hong Kong equities attracted cumulative inflows of RMB 342.663 billion, with RMB 286.858 billion flowing in during the second half of the year, accounting for 83.71%, exhibiting a pronounced 'second-half acceleration' pattern.
This 'continuous, stable, and large-scale' capital inflow collectively forms the underlying driving force behind the re-pricing of liquidity in the Hong Kong stock market.
As the quantitative changes in liquidity begin to enter a qualitative transformation phase, the market's demand for more sophisticated and higher-level risk management tools becomes apparent. It is against this backdrop that a pivotal turning point of structural significance has emerged — the Hong Kong Stock Exchange launched one of the most substantial index futures in nearly four decades.
Thus far, the narrative of capital returning has evolved from 'liquidity recovery' to a higher-dimensional story of 'systemic upgrade.'
02
Launch of Hang Seng Biotech Index Futures: The Synergy Between Derivatives and ETFs
On November 28, the Hong Kong Stock Exchange officially launched the 'Hang Seng Biotech Index Futures.' This represents a significant expansion of the derivatives ecosystem in Hong Kong stocks and marks the first time the biotech sector has been equipped with a dedicated risk management tool.
The biotech industry inherently features a 'high volatility, high growth' dual-edged structure. As of October 31, 2025, the annualized volatility of the Hang Seng Biotech Index reached 39.4%. In markets lacking hedging instruments, highly volatile assets often struggle to attract long-term institutional capital. The introduction of index futures essentially provides institutions with a 'risk management foundation,' enabling them to hedge volatility with futures while capturing growth through ETF allocations.
The core principle is to enhance institutions’ willingness to hold and, in turn, deepen overall market trading activity.
Historical experience corroborates this. Since its launch in 2020, the trading volume of Hang Seng Tech Index Futures has grown 88-fold over five years, becoming the third-largest futures product in the first three quarters of 2025, trailing only the Hang Seng Index and the China Enterprises Index. The prosperity of derivatives, in turn, significantly enhances the trading depth, pricing efficiency, and institutional participation in ETFs and their underlying spot components.
Futures provide market makers with hedging tools, narrowing the ETF bid-ask spread and reducing impact costs. Meanwhile, the influx of multi-strategy funds, including arbitrage, futures-spot combinations, and volatility strategies, has made industry ETFs a key channel for incremental capital.
As the futures and spot markets gradually mature, ETFs tracking indices have become an important bridge connecting futures and spot markets, while the Hang Seng Pharmaceuticals ETF (159892) has emerged as a key window for observing changes in sector capital structure.
03
The underlying index of Hang Seng Pharmaceuticals ETF (159892) continues to lead year-to-date.
After the futures market completed the industry’s risk management chain, industry ETFs began to serve as one of the 'standardized entry points' for institutions to access the biotech sector.
Among ETFs tracking the Hang Seng Biotechnology Index, the Hang Seng Pharmaceuticals ETF (159892) has a scale of 6.207 billion yuan, ranking first in its category, further amplifying its liquidity advantage.
The Hang Seng Biotechnology Index tracked by the Hang Seng Pharmaceuticals ETF is deeply focused on two high-growth sectors: 'innovative drugs + CXO.' Its constituent stocks include globally competitive innovative drug and R&D service companies such as BeiGene, Wuxi Bio, Innovent Bio, and Akeso Biopharma, with the top ten constituents accounting for a combined weight of 70%.
In September this year, the index completed its largest-ever adjustment in history, streamlining its constituent stocks from 50 to 30. Traditional companies were removed, with a focus on enterprises with higher innovation levels, significantly enhancing the 'purity' of core assets.
In terms of performance, the Hang Seng Biotechnology Index surged by 112% earlier this year. Despite recent adjustments, as of November 27, its year-to-date increase still reached 83.36%, continuing to outperform the broader market.
The underlying reasons stem from the convergence of three key industry drivers:
First, the restructuring of the payment system.
The first introduction of a commercial insurance directory for innovative drugs marks the transition of China's innovative drug payment system from a single medical insurance model to a diversified payment structure encompassing both 'medical insurance + commercial insurance.'
Second, the entry into the substantive phase of earnings realization.
Hong Kong’s Chapter 18A sector is gradually moving beyond the 'R&D consumption phase' and entering the stage of earnings realization. The mid-term performance of the Hang Seng Biotechnology Index showed that the net profits of constituent stocks increased by 56% year-on-year overall, with eight companies achieving net profit growth exceeding 100%.
Third, the comprehensive acceleration of globalization.
China's innovative drugs are transitioning from 'domestic substitution' to 'global export.' As of the end of October 2025, the scale of overseas expansion for China’s innovative drugs reached USD 115 billion, accounting for half of the global market.
These structural changes have collectively driven a systematic improvement in the earnings outlook of constituent stocks, providing strong support for the index's outstanding performance over an extended period.
04
From Liquidity Boom to Institutional Dividends: An Upgrade in the Pricing Power of Chinese Assets
The Hong Kong stock market in 2025 is undergoing a critical turning point from 'liquidity-driven' to 'system restructuring.'
The launch of the Hang Seng Biotech Index futures is not merely the birth of a financial instrument; it marks the formal entry of China’s biotech assets into the global pricing system.
As liquidity, institutional tools, and industry trends begin to converge, the role of Hong Kong stocks within the global pricing system is also changing:
It provides the derivatives infrastructure necessary for high-volatility industries to interface with global institutions;
It upgrades ETFs from single allocation tools to trading hubs that carry cross-market and cross-strategy capital flows;
It allows investors to more clearly observe the long-term position of China's innovative pharmaceutical industry within the global capital system.
More importantly, the Hong Kong stock market is moving toward a truly mature stage.
Asset values no longer rely on sentiment but are supported by three pillars: performance, institutional frameworks, and globalization.
Industries no longer experience 'isolated' fluctuations but are incorporated into a structured pricing system linked to futures and spot markets.
The global influence of China's innovative assets is extending from the corporate sector to the capital markets.
This is no longer just a revaluation of a specific sector but another collective manifestation of China’s long-term competitiveness at the capital market level.
When short-term market noise is filtered out by more robust institutional mechanisms, what truly determines direction is the industry’s ability to navigate cycles and the enduring forces of globalization.
The correction of 'expectation gaps' in Hong Kong's stock market may only be the beginning of a longer-term narrative.
