Active exchange-traded funds (ETFs) look set to gain increasing appeal with Asian investors, amid a fast-growing overall market for the index-linked products. 

Data provider ETFGI reported Thursday (January 18) that ETFs listed globally saw net inflows of $653.97 billion in 2017; 67.4% more than net inflows for 2016, and over double the average for net inflows over the previous five years. 

ETFGI did not break out Asian ETF growth figures from the global total at the end of 2017. But its latest Asia Pacific figures on December 17, 2017, estimated there to be 168 exchange-traded products, worth $993 billion. That compared to 130 ETPs worth $830 billion in 2016. 

Asian fund industry players suggest 2018 could see a continued expansion of the region’s ETF listings. 

“There is likely to be a significant broadening of the product choice on Asian exchanges this year,” Stewart Aldcroft, managing director at Citi Markets & Securities Services told AsianInvestor.

Almost all the major market indices have been covered by one or more of the local ETF providers, he added, "so there will be fewer new products linked to well-established indices".

David Quah, co-managing director of quantitative investment solutions at Hong Kong-based Value Partners, said regulatory accommodation will support the development of new ETF product types, including active ETFs.

Active ETFs are the latest global product trend resulting from the increasing popularity of passive funds, as investors flee expensive poor performing active funds. The active ETF has a manager making decisions on the underlying portfolio allocation and as such they do not adhere to a purely passive investment strategy. Their fees are approximately half those of a regular mutual fund.

Aldcroft added, “There is increasing interest among managers, especially traditional fund managers, for active ETFs, and the Securities and Futures Commission [in Hong Kong] has indicated it might be willing to allow these to be launched later in 2018.  This is a positive development area.”

Melody He, managing director and head of the ETF business at Chinese asset manager CSOP, added that she sees more issuance of smart beta and thematic ETFs, plus a broadening of the fixed income offerings locally.  She confirmed that CSOP will be introducing a wider range of index and non-index related ETFs in Hong Kong, including smart beta, Hong Kong and overseas equities and fixed income funds during the year.

Going global

BlackRock, the world's largest asset manager by assets under management, believes regional investors are likely to more actively peruse the global ETF market this year, rather than demand a range of new exposure ETFs on Asian exchanges.

Susan Chan, head of iShares (BlackRock's ETF brand) and index investment for Asia Pacific, said she sees "a continuation of Asian investors becoming more sophisticated in their use of ETFs, sourcing liquidity from existing ETFs trading in the region, and through the US and Europe."

ETF Connect is seen by some as a game changer for the cross-border ETF market in China and Hong Kong. Quah’s view is that “Depending on the criteria for inclusion, ETF Connect can be far reaching for the Hong Kong ETF market, since many existing and new managers will be motivated to grow their existing ETFs and/or launch new ones which fulfil ETF Connect inclusion criteria.”

If this happens, he predicts “Hong Kong will be transformed from a metropolitan ETF market into a continental-size market. Both mainland and Hong Kong investors will have greater investment choices, although competition among ETF managers in both markets will be much keener.”

This would be good news for Hong Kong. It and Singapore were probably the only exchanges globally to see a reduction in the number of ETF listings last year, because there were many de-listings and not so many new products brought to market, observed Aldcroft.

The addition of leveraged and inverse (L&I) products was a positive for the Hong Kong market in 2017, he noted, but said more needs to be done. "We need to see greater choice among these, especially for the addition of China-index products. We could also see some new products aiming to provide global market access, designed for use in the ETF Connect scheme, targeting mainland investors”.

It is not clear at this point when ETF Connect might be introduced, although signs are pointing to a launch late this year. CSOP’s He said “The regulators are pushing and prioritising ETF Connect. However, there are still hurdles such as settlement differences for ETFs between the different exchanges.  Creation and redemption methods are also very different across the markets.

From his vantage point, Aldcroft confirms that “the Hong Kong Exchange and the SFC, and their counterparts in China, are now actively talking to get the ground rules firmed up. They are still targeting the second half of this year for launch. That seems realistic given the market conditions and requirements.”

AsianInvestor asked the SFC to comment but received no response by press time. A spokesman for the HKEX said it is working with mainland counterparts to include ETFs in the Connect programme, "but there is no timetable".

Limited impact

Harmen Overdijk, managing partner of Hong Kong-based private client adviser Capital Company is less sure of the significance of ETF Connect for Hong Kong. He told AsianInvestor, “I don't think it will have any significant impact on investment flows as there is already Stock Connect and the Asian retail investor is not big into ETFs anyway.”

Meanwhile, industry players said they do not anticipate much activity in the way of bitcoin or cryptocurrency ETFs.

“Now it has become easier to trade for international clients, since there are futures listed, our understanding is that local clients here get exposure to bitcoin by investing into related stocks or directly into bitcoin itself," said He. 

Quah added, “I do not think a bitcoin ETF will obtain the regulatory green light in Asia. It is just an investment fad which appeals to a certain market segment.

Overdijk was less circumspect: “Why would you want to buy an ETF? A Bitcoin ETF would go against the basic concept of cryptocurrencies. You would centralise a decentralised concept. Unless investors would see it as an investment product, in which case they need to have their heads examined.”