Eight in 10 Asian investors not using ETFs

Institutional usage and understanding of exchange-traded funds in the Asia-Pacific region seem surprisingly low. Indeed, usage appears to be substantially lower than this time last year, while awareness of the relevant factors to consider has risen in some areas but not others, albeit according to a snapshot poll.

Some 83% of 10 institutions and 88% of individual investors in the region are not currently invested in ETFs, finds the Deutsche Asset & Wealth Management 2013 Asian ETF survey. (These represents sharp rises over the figures last year of 36.6% for institutions and 64.3% for individuals in 2012.)

The most cited reason among institutional investors for not buying ETFs this year was ‘concern about counterparty risk’, followed by ‘low on-screen volume’. For individuals, the most popular reason was ‘brokerage fees’, followed by low on-screen volume, then concern about counterparty risk.

Respondents seemed relatively indifferent about the use of Ucits structures for ETFs. Some 39% said they “understand and value Ucits as a robust regulation framework to ensure quality of ETF structure and reliability”, 29.5% said they’d “heard about it but not sure of the details and to what level of recognition it has in Asia”, while 31.1% said they “don’t mind whether a fund is Ucits or not”.

(Last year these figures were, respectively, 40.4%, 39.7% and 19.9%, suggesting a better understanding of the Ucits structure now.)

Interestingly, Asian institutional respondents are still unaware of certain important factors related specifically to trading ETFs. For example, over one-third (36.7%) of institutional respondents said they were unaware that ETF liquidity is dependent on the underlying market’s liquidity, and not purely on the onscreen liquidity of the ETF itself.

And fully half of institutional respondents said they were not aware that US-listed ETFs may involve a tax disadvantage for non-US investors in the form of dividend tax and estate tax. Meanwhile, 36.7% said they were aware and avoided US-listed ETFs that have that disadvantage, while 13.3% said they were aware, but “don’t care”.

Finally, over a third (36.7%) of institutions said they were unaware that some ETF providers use derivatives or lend securities, while the same proportion were aware of this. Meanwhile, 26.6% said they avoid ETF providers that engage in these practices.

The upshot of all this? There is some way to go in terms of Asian investors’ understanding of how ETFs work – and in terms of how much they use them. It seems likely that both will rise as the market develops in the region.

An overall 62.3% of respondents this year said they plan to increase their ETF allocation, down from 84.3% in 2012.

Marco Montanari, Asia-Pacific head of passive asset management for Deutsche Asset & Management, notes that ETF providers must continue to supply investor education.

"More investors in Asia are recognising that ETFs are an easy, cost-efficient way to get exposure to an incredible diversity of markets," he says. "But it is essential that they are helped to make informed investment decisions, especially given current market uncertainty and the lack of clear direction across asset classes."

More than 300 institutions, intermediaries and retail investors in Asia Pacific took part in this third edition of the annual survey.