Examining Asia's ETF market
Exchange traded funds (ETFs) are gaining momentum -- and credibility as a valid long-term investment -- in Asia, thanks in large part to the global financial crisis which prompted many investors to consider these as less risky products. But even so, the volume of trading in Asia is still nowhere near the US and is in danger of trailing the European market.
Boston-based financial services consulting firm Cerulli Associates believes that management fees have something to do with the low intake of ETFs in Asia compared with the US. Low liquidity and having only a few key industry players are also a deterrent.
"One key factor why ETF uptake was somewhat muted, even among institutions, before the 2008 spurt is the fact that ETF management fees are not as low as might be expected," Cerulli says in a recent report on ETFs.
This is particularly the case in markets such as Singapore, Cerulli notes, where fees on funds offered by Lyxor and iShares, for example, typically range between 0.65% to 0.90%. In Taiwan, ETFs offered by Fubon Asset Management carry fees ranging from 0.3% to 0.4%.
"Managers argue that higher fees compared to the West are necessary in Asia's less liquid markets," Cerulli says.
That argument, Cerulli notes, points to another problem that Asian ETFs face -- a lack of liquidity, which continues to be another major reason why Asian institutional investors think twice about ETF investing.
The problem of liquidity is even more acute in Japan, Cerulli says, where more than 60 ETFs currently domiciled there have an average daily trading volume per fund of just $2.2 million, compared to $3.3 million in Asia, $3.1 million in Europe and $124.3 million in the US.
ETF flows within Japan were a mere $3.1 billion in 2008 and continue to disappoint, Cerulli says, although the Japanese government now plans to purchase local ETFs in an attempt to boost capital markets and stimulate the economy.
For domestically focused ETFs, a number of local providers are dominant in their markets, and this also impedes a truly vibrant ETF market. Lacking strong global investment capabilities, ETFs offer these local managers an opportunity to diversify their product range with minimal extra costs, Cerulli says.
Cerulli outlines the scenario in various Asian markets.
Taiwan's ETF market is comprised of just two players: Polaris and Fubon Asset Management, although State Street acts as sub-advisor for a couple of Polaris ETFs. South Korea's Samsung Investments, Woori Credit Suisse, and Mirae lead a list of seven local or joint venture ETF players. In other Asian markets, local players have sought to undermine the dominance of their foreign counterparts by offering significantly lower fees. For example, the management fee for the Hang Seng FTSE/Xinhua China 25 Index ETF offered by Hang Seng Investment Management is 0.55% per annum, compared to 0.99% for the iShares FTSE/Xinhua A50 China Tracker and the iShares MSCI China Tracker. Hang Seng Investment Management is currently the third largest provider in the Asia-Pacific, ex-Japan.
For the retail segment, the problem up to now has been that fund distributors are generally reluctant to promote ETFs to their clients, Cerulli says. While ETFs are available on their brokerage platforms, minimal front-end commissions and the potential that ETFs could cannibalise their mutual fund sales have caused banks to be less than enthusiastic about slotting them onto branch shelves.
Having said all that, perhaps the global financial crisis can help boost ETF trading volumes and strengthen the market in the region.
After all, as Cerulli notes, banks are not only struggling with reduced mutual fund flows, but, perhaps even more importantly, with the rise of regulatory restrictions on investment sales pertaining to disclosure and product transparency.
"ETFs have acquired newfound appeal for fund distributors," Cerulli says. "However, they must still prove their ability to deliver profits comparable with those earned on mutual funds."
One way to do so, Cerulli says, is to offer value-added, non-fiduciary portfolios of ETFs, packaged to suit various client risk profiles and investment objectives. It may take a while before this becomes feasible, however, because the severe lack of diversity in the ETFs domiciled in Asia limits the types of portfolios that banks are able to offer their clients. Equity ETFs make up 97% of those domiciled locally, while bond-based ETFs are virtually nonexistent.