Exchange-traded fund (ETF) assets in Asia have grown 20% to $104.1 billion in the first three quarters of 2011, with the market expected to double over the next four to five years, according to State Street Global Advisors (SSgA) data.

Korea is the top Asian exchange by trading activity with $66.3 billion in turnover and 19 million trades in the year to 30 September, followed by Hong Kong with $56.3 billion on 1.8 million trades and Shanghai’s $30.6 billion on 3.1 million trades, as indicated by figures from SSgA and the World Federation of Exchanges.

Hong Kong’s $27.6 billion in ETF assets “is small but still has a lot of upside”, due to its role in providing investors with exposure to mainland stocks via China companies listed on the Hong Kong exchange, and also by facilitating outbound capital flows from the mainland, says Frank Henze, managing director of the firm’s SPRD ETFs unit for Asia-Pacific. “It is probably going to be a market that is going to grow exponentially,” says Henze.

Asia accounts for a small, but growing portion of global ETF assets of $1.54 trillion, which SSgA expects to double to about $3 trillion by 2015-16, says Henze. Asian institutions account for an estimated 80% of ETF asset growth in the region, even though only about 28% of institutions utilise them, indicating a heavy concentration of trading volume by the investor class.

ETF usage by Asian institutions varies according to individual markets. Korea is a largely retail-oriented ETF market, while Japan is heavily institutional, notes Henze. “The uptake in Singapore is a lot more through private wealth and intermediary retail [channels] – you’re looking at a lot of feeder funds, or fund of funds and balanced funds, than the asset management world.”

ETFs globally saw $100 billion of new net flows in the first three quarters of the year, which have partly come at the expense of mutual funds, which had outflows of $232 billion. Henze says it “is indicative of a shift in investor appetite between ETFs and mutual funds”. SSgA believes the attraction of ETFs is attributable to the fact that the product can be traded flexibly, with investors able to take long or short positions easily.

Henze predicts greater retail uptake in ETFs in Asia, particularly as regulators in the region mandate a change of fee structures from commission-based to fee-for-service, in markets such as Australia and Singapore.