Asian capital continues to pour into exchanged traded funds (ETFs) and products (ETPs) but efforts to educate the region's investors on these types of products have barely scratched the surface, according to some market participants.
Net new assets invested into Asia-Pacific ex-Japan ETFs and ETPs reached $2.87 billion in September and $18.97 billion year-to-date, marking the 11th straight month of net inflows into ETFs and ETPs listed in the region, data from ETF consultancy ETFGI shows
Judging by the pace of ETF development, both in terms of different ETF types and the growing number of ETF providers, it's clear the industry is responding to a growing swell of demand, Janet Li, wealth business leader at Mercer, said.
“Generally seeking alpha is not easy, so coupled with the fact there are many more innovative ETFs being launched in the market, that definitely has provided some good alternatives for asset owners to choose from,” Li told AsianInvestor.
For all that, the level of familiarity remains quite low.
“Limited is probably the most polite word; most people I talk to in Asia do not know what an ETF is,” Tariq Dennison, director of ETFs and pension portfolios at GFM Asset Management, said.
And even if they do know what an ETF is, there is still a long way to go in educating investors on how to use ETFs, how to shop for them, and how to know which ones are appropriate for which investors.
"The biggest risk I would say is for those who don't know what they're buying, who take risks that are way too concentrated, and use way too much leverage for the goal that they're trying to achieve," Dennison said.
As demand for specialised ETFs has grown in Asia, so too has the number of factor-based, leveraged, inverse, and other alternative index-type ETFs in the region as ETF providers look to improve market share.
There were 1,318 Asia-Pacific ETFs and ETPs with assets of $184 billion from 134 providers as of the end of September 2017, compared with 1,134 Asia-Pacific ETFs and ETPs with assets of $155 billion from 121 providers at the end of August 2017, according to ETFGI.
Asian insurers in particular, such as Prudential Corporation Asia, have increasingly started to buy or up their exposure to ETFs and factor-based ETPs.
However, some asset owners are increasingly wary of the potential contagion risk among exposure-type ETFs, especially during periods of heightened volatility as seen already at different points this year, and that could yet impact the future performance of ETFs.
“Given the market outlook, generally, is a bit less positive now, when we look at what investors can invest in there might be opportunities for investors to take a more defensive or wait-and-see approach in the coming year, which would affect the trading volume popularity of ETFs and, in turn, affect the performance of ETFs,” Mercer’s Li said.
A structural tide could yet wash over that, though, and boost ETF interest among Asian investors if regional regulators start pressing for bigger fee disclosures.
“That’s how it worked in the US; once retirement plans had to disclose how much was being paid on certain products, that’s what really pushed the ETF industry there,” GFM's Dennison told AsianInvestor.
That's because one of the main ETF selling points – its low fees – is also, indirectly, a key reason why investors in the region are not overly familiar with the product type.
“There’s a lot of money invested in life insurance policies [in Hong Kong] because there are agents who get paid huge commissions to sell those – no one can really get paid a huge commission selling an ETF,” Dennison said.