Investor take-up of exchange-traded funds (ETFs) across Asia is growing steadily, but it is international products gaining the most appeal. Locally managed ETFs will never match the success of their counterparts in the US or Europe until the region boasts one integrated marketplace, say local players.

Critics of ETFs have often commented that major collapses would undermine their popularity, as they reflect these falls. However, while some active investment strategies to outperform amid the volatility caused by the Covid-19 pandemic, ETFs have generally continued to gain popularity with Asian investors, according to Yoon Ng, Singapore-based director of research at Broadridge.   

However, this appetite has centred upon US and European index-linked products. The market for regionally-focused ETFs, especially in key centres like Hong Kong and Singapore, has not grown by that much.

Aleksey Mironenko,
The Capital Company

“ETF use among Asian institutions is skyrocketing – it’s simply not visible because they don’t trade Asian ETFs,” said Aleksey Mironenko, global head of investment solutions at wealth manager The Capital Company, based in Hong Kong.

The region’s institutional investors can trade globally and frequently use London or US listed passive vehicles. “They are buying S&P 500, Eurostoxx 50, US investment grade credit, even Asia exposure, but on US and European stock exchanges, where the ETF landscape is drastically different.”

Regional ETFs are less appealing because they are typically single market-based, and thus reflect markets far smaller than those of the US or Europe. As a consequence, they also offer less liquidity.

Mironenko believes the best way to encourage more ETF liquidity in Asia is to “tear down regulatory barriers across the region”, by creating an Asia-wide ETF Connect “and allow Asian investors to roam freely to the best products”.

“An ETF Connect across the region is the only way to truly compete with the size, scale and liquidity of US and European markets," he added. "As long as Asian regulators and exchanges protect their home turf at all costs, they will continue to lose to the US and to Ucits.”

Asia has the world’s most digital population, yet the industry relies on in-branch seminars and 2-page pdf factsheets to reach its goals, he added.

“Just like ETFs are a 21st century product, ETF providers must employ 21st century efforts to build awareness and knowledge about their offering and why it’s better for investors.”

CHEAPER OPPORTUNITIES

In addition to building a broader market, Asian ETFs need to become more cost competitive.

While the average US ETF charges 0.2%, the average ETF in Asia charges 0.39%. Remove the three biggest Asia-based ETF markets of China, Taiwan and Korea, which are also among the lowest cost, and the cost difference is even larger.

“In the US, the average fee goes up only 0.02% to 0.22%. However, Hong Kong skyrockets from 0.44% to 0.78%, and Thailand from 0.28% to 0.87%,” Mironenko said.

There are signs these fees might begin to drop, with Australia leading the way. The country’s cost-conscious superannuation pension funds are pushing for transparent fixed-fee charges from asset managers, while building up their internal investment teams. Broadridge’s Ng said their desire to lower fees is likely to ensure the Australian ETF market grows strongly; “it’s a fertile market for ETFs”.

“We would expect managers in other parts of Asia, where investors are becoming ever more fee conscious, to closely observe developments in Australia,” added Ng.

Life insurers may be some of the leaders in raising the usage of ETFs – and demanding more competitive pricing. The asset owners have to invest most their assets into local debt, to minimise capital costs and currency risks, and local fixed income ETFs offer a sensible way to do so.

While lifers’ general accounts seem to award more active mandates than passive mandates, they are also keen buyers of regional fixed income ETFs. Assets managed in Asia Pacific fixed income ETFs jumped from $27 billion to $64 billion during 2019 alone, said Ng.

Taiwanese insurers account for almost all the inflows into domestically listed ETFs, and while they slowed purchasing earlier this year, they resumed buying ETFs in the third quarter. And Mironenko predicted that a broader rally in bond prices could lead more institutional investors to become more active. What rally is this exactly?

China could also see a broader variety of cheaper ETFs in the months to come. Its fund managers have started to cut fees as competition heats up, which is fuelling ETF interest. The country’s rapidly growing $100 billion ETF market is expected to continue its fast growth, although the products fees look set to keep dwindling.

Several managers launched ETFs with ultra-low fees of 0.15%-0.2% last year, roughly one third the amount of equivalent ETFs in the market, said Ng.