Asian stock exchanges have a lot of work to do if their exchange-trade fund markets are to match ETF asset growth globally, says one of the region’s product development heads. The Malaysian and Singaporean bourses in particular are boosting their efforts to increase the number of ETF issues, encouraged by Hong Kong’s recent success with the launch of its first leveraged and inverse products.
ETFs have seen strong growth in North Asia, but not elsewhere in the region. Luuk Strijers, head of equity and fixed income products at Singapore Exchange (SGX), said the Asian ETF market could not be considered a success when measured again Europe and the US.
“Overall, looking at our market, it is trading below the levels where we want it to be,” he told AsianInvestor. “I think the same applies to most of the markets in Asia. So there’s a lot of work to be done in Asia, regardless of which market you focus on.”
According to London-based research firm ETFGI, there are 4,971 ETFs globally with $3.8 trillion in assets under management (AUM), of which 872 are in Asia Pacific with AUM of $133 billion.
Southeast Asia lagging
Market development has been particularly slow in Singapore and Malaysia. SGX has 80 ETFs, but only one listed in 2016 and none the previous year. There have been two more this year, and on that basis the mood at the bourse is more optimistic. The first L&I funds are expected to list in Singapore later this year, as reported.
Apart from yield-type products, such as real estate investment trusts (Reits), the most actively traded ETFs in Singapore are local products such as STI Index ETFs, regional products such as MSCI Asia ex-Japan, and single-country funds, MSCI India being the current favourite.
Meanwhile, Malaysia saw its first ETF launch in 2005, but there are still only eight products listed on Bursa Malaysia, and the last launch was in 2015.
A task force on ETFs set up last month by Malaysia’s Securities Commission (SC) in association with the exchange has issued recommendations aimed at encouraging more investor participation and issuance by ETF managers.
For instance, the Malaysian task force recommended the minimum capital requirement for ETF issuers be cut from RM10 million ($2.3 million) to RM2 million.
Other measures include a fast-tracking of approvals and the broadening of distribution channels by permitting financial institutions, online platforms and financial planners to sell ETFs via stockbroking companies. SC declined to say how much faster the approval process would be.
The regulator and Bursa Malaysia are also looking to help market-makers in provide liquidity for ETFs by providing them with rebates and waiving certain fees, such as clearing charges.
Moreover, the taskforce is looking at including futures-based and conventional commodity-based ETFs and at allowing greater flexibility in terms of investment strategies, including the introduction of L&I ETFs.
The SC said the task force's recommendations would be implemented by the end of this year.
Seeking product diversity
The need to create a more diverse menu of ETFs has also been highlighted by Brian Roberts, head of ETFs at Hong Kong Exchanges and Clearing (HKEx). AUM in Hong Kong-listed ETFs has grown just 7% in the 12 months to April 2017, from $35.2 billion to $37.8 billion, according to HKEx.
Roberts told AsianInvestor the exchange had seen growing demand for commodity ETFs, in particular gold, fixed income and factor strategies. “We believe these will be sustained demand trends and a key area of industry focus for future product development,” he said.
Meanwhile, Australia’s ETF market has seen steady growth of 30% since 2004, when the first products were listed on ASX, to AUM of A$29 billion ($22 billion). Most of the industry growth of late has come from net new money rather than asset appreciation, according to local ETF provider BetaShares.
Alex Vynokur, BetaShares managing director, said the firm expected to see more products based on cash and fixed income, as investors seek income away from volatile equity markets.
L&I funds a common theme
The recent success of L&I products in Hong Kong has been noted by neighbouring markets. Since launching in March, L&I HSI and HSCEI products have between them achieved average daily turnover of HK$630 million, said Roberts.
He emphasised, though, that while trading volume is important, “we are focusing on growing ETF AUM across the product range, because as assets grow, so will trading”.
Hong Kong’s Securities and Futures Commission has gradually loosened the restrictions on L&I products, so there may heightened activity in this space, especially if China stocks were to be included into the MSCI emerging markets index, a decision to be announced next week.