China driving growth in Asia ETFs

Mar 16, 2015

Assets in Asia exchange-traded funds rose by 4.4% to $118 billion in February, according to a new report. And Deutsche has identified currency-hedged ETFs as one of the key growth drivers of the asset class.

Invested assets in Asia exchange-traded funds are hitting new highs, with much of the recent inflows going into China-focused funds.

The surge in February saw the majority of net new assets being allocated to equity-based funds, while fixed income funds suffered net outflows.

It comes as Deutsche Asset & Wealth Management advises Hong Kong to diversify its ETF sector away from Greater China, in a new report on the state of the Asia market.

London-based research firm ETFGI yesterday released its latest data, which showed that assets invested in ETFs in Asia-Pacific ex-Japan hit $118.3 billion at the end of last month, a rise of 4.4% from $113.3 billion in January

Fund groups experiencing the largest inflows included Huatai-PB, which received the largest net inflows in February of $1.05 billion, followed by CSOP/China Southern with $656 million. Mirae Horizons was in a distant third place with $146 million in net inflows.

Equity ETFs/ETPs received the largest net inflows with $1.49 billion, followed by commodity products with $55 million, while fixed income funds suffered net outflows of $146 million.

Deborah Fuhr, ETFGI managing partner, said investors globally allocated the majority of their net new assets to equities in February, amid rebounding US stock markets, which saw the S&P 500 and the Dow Jones rise 6% over the month.

Meanwhile in a briefing yesterday, Deutsche AWM's passive management team set out the current and future drivers behind ETF growth in Asia.

Deutsche identified four trends driving the Asia ETF market: smart beta; using ETFs as an alternative to futures; use of currency-hedged ETFs; and growth of fixed income ETFs.

However, of those the key driver was currency-hedged ETFs, said Deutsche’s head of passive asset management for Asia Pacific, Marco Montanari.

Montanari said that "there has been an explosion of interest and assets" in currency-hedged ETFs. They have grown 16 times to $20.8 billion since the start of 2013. Deutsche said investors significantly expanded their use of non-Japan currency hedged ETFs in 2014, from 7% of all currency-hedged ETF assets at the start of last year to 38% at the end of December.

Weakness in Asian currencies, and a strong dollar, have been the main reasons behind the growth of the forex hedge. Montanari added: “If the US dollar remains strong as it is now, we expect by the end of the year forex hedged ETFs will become even more popular, especially against Asian currencies like the yen and the won.”

Deutsche said it expected the forex hedge to become the main driver of growth in the Asia ETF market in the months to come.

On Hong Kong's ETF market, Deutsche said that the city’s market needs to expand its sources of revenue. Right now 91.3% of Hong Kong’s ETF assets under management are linked to the Greater China region. That compares with just 45% of ETFs in Europe.

Montanari commented: “The Hong Kong ETF market needs diversification in order to maintain its growth and its leadership position in Asia. The growth of the Hong Kong ETF market needs game changers – and the real game changers would be the rise of non-Greater China underlying assets.”