Too many China, too few niche ETFs seen in Asia

There is a surfeit of traditional China equity exchange-traded funds when investors actually want more specialised products, panellists said at the Inside ETFs Asia forum.
Too many China, too few niche ETFs seen in Asia

Exchange-traded funds, while growing in appeal, still account for a relatively small proportion of most Asian portfolios. One of the challenges to greater adoption seems to be that while investors are looking for more specialised products in the region, many issuers are offering generic products.

That was the view of some panellists on Thursday on the second day of the Inside ETFs Asia forum co-organised by AsianInvestor in Hong Kong.

“What I tell a lot of ETF issuers is that we don’t need another China ETF," Rebecca Sin, head of ETF sales trading for Asia Pacific at Commerzbank, told delegates. "There are already so many ... and the average investor doesn’t even know the difference between the MSCI China or FTSE China 50 ETFs.” 

Dennison, GFM AM

What investors need are more interesting products that better suit their investment needs, as opposed to just another China ETF, she said.

Sin wasn't alone in finding fault with the current state of the Asia ETF market, although others focused more on the absence of niche products, Chinese ones included.  

“What I think is missing is some individual factors on [China] ETFs,” Tariq Dennison, pensions adviser for GFM Asset Management, said. “I am still waiting for a China momentum ETF or a deep value factor ETF."

He noted that while some product categories had too many me-too products, other categories had nothing to cater to investor demand.

“For instance, there are not very many [China focused] fixed income ETFs [in Asia] and we would love to see that,” he said, adding that he would be interested in a product such as a China smart-beta high-yield renminbi ETF.

Other interesting products could be a China bank loan ETF or a trade flow ETF, he added.

At the end of September, the Asia Pacific (ex-Japan) ETF/ETP industry had 1,318 ETFs/ETPs, with 1,474 listings, assets of $184 billion, from 134 providers listed on 17 exchanges, according to London-based ETFGI. Some 160 of them are fixed income ETFs.
Commerzbank’s Sin said investors were always asking about fixed income China ETFs but she noted how there were too few bonds that could be easily accessed in China to create a truly scalable ETF. While China’s fixed income market is huge, it is still highly illiquid, she said.

"Outside China, the largest fixed income ETF is listed in Singapore and from iShares, which has about $70 million in assets under management, she pointed out. 

Sin, Commerzbank

“Most of our institutional clients who trade in fixed income go to the US or Europe as the AUM for such ETFs is larger,” she said.

Most institutional investors won’t trade an ETF unless it has at least $100 million in AUM; for some, an ETF won't even get on the approval list unless it has been listed for three years. Some representatives on the first day of the forum also highlighted the difficulties and extra costs involved when trying to replicate a bond index's performance via an ETF.

Across the two-day event, panellists underlined the importance of doing more to educate investors on the benefits of using ETFs.

Sin said many investors still did not realise, for example, how cheap ETFs could be, citing an emerging markets ETF from State Street that charged just 11 basis points -- much lower than what a comparable active manager might charge.

As such ETFs can help investors diversify more cost-effectively, she said.

GFM AM’s Dennison said many investors also didn’t realise ETFs can be part-active, as opposed to being just market-cap-weighted index trackers. 

Investors can get a mix of active and passive with smart beta, for instance, he said. Such ETFs systematise the generation of alpha while charging as low as 25 basis points, which is more effective that paying 125 basis points for an active manager, especially in a market like China where active managers have found it challenging to beat equity benchmarks, Dennison said.

In a survey conducted by the Hong Kong Exchange between April and September, 88% of institutional respondents said they had included ETFs in their portfolios. About 56% said they were interested in smart beta ETFs, while another 43% said they were keen on fixed income ETFs.

However, of those not yet invested in smart beta ETFs, 45% said it was because of insufficient knowledge.

Overall, 72% of respondents said they planned to increase ETF allocations over the next 12 months.

¬ Haymarket Media Limited. All rights reserved.