Deutsche Bank has launched six more exchange-traded funds (ETFs) on the Singapore Exchange (SGX), including Asia's first ETF tracking the performance of the Brazilian equity market.
The six ETFs are among the most successful in terms of assets under management of the 120 ETFs that the bank's db x-trackers unit provides in Europe. These 120 have a total of $37 billion in AUM.
Deutsche now has 16 ETFs listed on the SGX and six in Hong Kong, and the bank plans to bring its "multi-asset-class 'supermarket' range of ETFs to Asia", says Marco Montanari, Asia head of db x-trackers ETFs.
The six products are: the Emerging Markets TRN Index ETF, MSCI Brazil TRN Index ETF, MSCI Russia Capped Index ETF, MSCI World TRN Index ETF, MSCI Pacific ex Japan TRN Index ETF and MSCI EM Asia TRN Index.
The most likely investors in the new ETFs are funds of funds, private banking discretionary investors, insurers and pension and sovereign wealth funds (SWFs), Montanari tells AsianInvestor. He sees the biggest potential growth in inflows likely to come from pension funds and SWFs in Asia.
"The market share of ETFs held by pension and sovereign funds in Asia is currently around 10-20%, according to our estimates," says Montanari, "and we expect their investment to increase exponentially in future." These inflows will result from larger passive portfolio allocations, and a desire to reduce costs, internalise asset allocation and achieve greater diversification, he adds.
Deutsche Bank is an innovator in the ETF sector; it was the first to issue inverse (or 'short') and money-market ETFs in Asia, in February and August respectively. It was also the first to issue hedge fund and credit default swap ETFs in Europe. Montanari says db x-trackers is working with regulators to be able to issue further new products in Asia.
Some have raised concerns over whether investors fully understand some of the more complex ETFs on offer, such as inverse and leveraged ETFs. Montanari says: "We constantly emphasise the importance of reading the prospectus and understanding the product before investing in it. This is certainly the case for our short ETF, for which we provide specific additional explanatory marketing material."
Yet the fact remains that ETFs have not taken off in Asia to the same extent that they have in Europe. One issue some institutions point to is that the products are too expensive. But Montanari says he doesn't think fees are the real problem.
"The largest number of ETFs listed in Hong Kong and Singapore are 'passported' from Europe," he says, "so they have the same fees in Europe and are often less expensive than the ETFs exposed to the same market and listed in the US."
Montanari suggests there are three main areas to work on if Asia's ETF market is to be successful: better investor education at both the institutional and retail level; a larger product range; and, most importantly in the short term, educating institutional investors already invested in ETFs listed in the US that Asia-listed ETFs are a more efficient alternative from both a tax perspective and a trading time zone perspective.
With regard to the tax perspective, the dividend of a US-listed equity ETF is normally taxed at 30% for Hong Kong, Singaporean and Taiwanese investors, says Montanari. That means a loss of 1% a year on an index yielding 3%, usually more than the fees charged by the ETF itself.
As for the issue of time zones, he adds, it is more transparent to trade an ETF exposed to an Asian market while that market is open than to trade it in the US market while the underlying market is closed.
"We estimate the assets invested by Asian investors in US-listed ETFs at more than $30 billion," says Montanari. "Bringing this money back to Asia, where investors would avoid the 30% dividend tax, would mean doubling the assets under management of the Asian listed market."