Market Views: What is driving ETF interest in Asia?

Record-breaking amounts of capital poured into ETFs last year and in the first quarter of 2021. We ask investment experts whether the surge is likely to continue.
Market Views: What is driving ETF interest in Asia?

Investors broke all records in their fierce appetite for exchange traded funds in 2020. This has continued into 2021.

Global net investor inflows into exchange traded funds (ETFs) and exchange traded products (ETPs) totalled $359.2 billion in the first quarter of 2020, and net global ETF flows reached $1 trillion in the 12 months up to March 30, according to an FT article citing data provider ETFGI.

Flows into Asia-Pacific equity ETFs reached $19.3 billion in the first quarter of 2021, almost double the amount ($9.9 billion) for the equivalent period in 2020, according the article. Overall net inflows for ETFs and ETPs listed in Asia Pacific were $24.6 billion for the first quarter of 2021, ETFGI told AsianInvestor.

These record numbers indicate institutional investors are increasingly choosing ETFs as a cost-efficient way of diversifying, meeting liquidity needs or gaining access to particular markets or sectors.

Thematic ETFs are also piquing institutional investor interest. These track long-term trends, such as clean energy, rather than specific companies or industries. ESG-focused ETFs raised $31 billion in 2020, four times the amount in 2019, according to Bloomberg.

BlackRock’s Carbon Transition Readiness ETF, launched on the New York Stock Exchange, is the latest example: it raised $1.25 billion on its first day of trading on April 8, making it the largest ETF launch in history. Early investors included Singapore state investor Temasek, California State Teachers’ Retirement System and Finland’s Varma Mutual Pension Insurance Company. 

We asked investment experts whether more Asian institutional investor capital will flow into ETFs.

The following responses have been edited for brevity and clarity.

Kevin Anderson, head of investments for Asia Pacific          
State Street Global Advisors

Kevin Anderson

We are seeing the uses of ETFs becoming more varied and new pockets of ETF investors developing, particularly in the past decade. Globally, there has been a shift towards using ETFs for longer-term core allocations for institutional investors. They are also using ETFs alongside active strategies to place a tactical position in a sector or asset class or simply to manage cash.

In Asia Pacific, while the growth of locally listed ETFs is not as significant as those in the US or Europe, Asian institutional investors are increasingly adopting ETFs. Access to superior liquidity is important for large institutional investors. Recently, they have been using US-listed ETFs to gain exposure to US equities.

ETF use has been traditionally dominated by equities, but fixed income is rapidly growing globally, especially among Asian institutional investors. European domiciled Ucits (Undertakings for Collective Investment in Transferable Securities) fixed income ETFs are also of interest to some Asian institutions who may find their taxation treatment more favourable compared to investing in US domiciled ETFs

Deborah Fuhr, managing partner and founder

Deborah Fuhr

We are seeing an increasing use of ETFs by institutions around the world as they look to have easy, cost efficient and liquid ways to invest in equity and fixed income exposures.

Many institutions are using US listed ETFs for tactical exposures and are using European Ucits ETFs for core holdings. Others are making allocations to ESG themes as satellite exposures and increasingly as core holdings with new cash or though transitions away from market cap exposures. Sovereign wealth and pension funds were seed investors in the largest ETF listing - the BlackRock US Carbon Transition Readiness ETF which listed with $1.25 billion on the NYSE on April 8.

Investors are likely to like the regulatory requirement under SFDR for Ucits ETFs to be classified as article 6, 8 or 9, indicating how ESG they are on a scale of light to dark green. Additionally, as the weight of China in equity and fixed income indexes is increasing investors will increasingly use ETFs to help adjust their allocations.     

Stephanie Hill, head of index
Mellon, part of BNY Mellon Investment Management

Stephanie Hill

The case for ETF use by institutions around the globe continues to grow. We see institutions using ETFs for several different reasons, including as part of a transition as beta exposure, as liquidity sleeves and as tactical or opportunistic allocations.

Much of the institutional flow continues to be focused on the largest, most liquid ETFs which are becoming de facto trading instruments. It is important to remember that the ETF market transacts primarily using in-kind baskets of securities, so flow volatility inside individual ETFs does not usually impact the other ETF holders.

Sunny Leung, head of ETF, indexing and smart beta sales for South Asia

Sunny Leong

ETFs have been growing strongly for over a decade, with a 10-year CAGR of 22.2% for global ETF AUM. This year, in February alone, 84 new ETFs were launched taking the total number of ETFs available worldwide to over 7,700. 

The ETF structure encourages innovation and reduces the time to market for new investment ideas, allowing ETF providers to deliver a wide range of granular solutions to meet the varying needs of institutional investors simply and cost-effectively. There are several drivers to the increase in assets, from the broadening of the investor base to the demonstration of resilience during the Covid-19 crisis. 

Recently we have seen a rise in demand for sustainable investing; in fact, global ESG ETF assets more than trebled in the year to December 2020. With almost 200 more ESG ETFs available now than at the end of 2019, we anticipate a continued rise in investment across both equity and fixed income from institutional investors seeking to invest sustainably. We consider this a positive trend, as the more assets invested for good, the more good we can do.

¬ Haymarket Media Limited. All rights reserved.