Unblocking barriers to ETF growth in Asia

Exchange-traded funds (ETFs) recently celebrated their 20th anniversary and have swelled to $2.7 trillion of global assets under management (AUM), according to data from financial information services company Markit.

While this growth has been one of the biggest success stories in the financial markets, a common misperception is that it’s largely confined to the US market.

ETF penetration among US investors still accounts for 70% of global AUM, underpinned by an efficient single-currency jurisdiction and widespread retail investor adoption. Yet, international investors also have benefited from the liquidity, transparency and affordability of the increasingly wide range of ETF offerings.

Data from Markit show that for the two years to September 2014, Asia-Pacific-listed ETF AUM growth has outpaced growth in other regions, a fact that few are acknowledging or are even aware of.

While these funds are still heavily tilted towards domestic equity and fixed income products, 109 of the 504 ETFs listed in Asia over the past five years have exposure to markets outside the region. This gives Asian investors a growing set of tools with which to express their investment strategy outside domestic markets.

In terms of net new flows, Asia-Pacific-listed ETFs have attracted more than $22 billion of new assets in 2014, or about 8.5% of total global new inflow. This rate of growth has outpaced the inflows seen across all ETFs globally, which underscores how Asian investors have become a more significant part of the industry’s success story.

"ETFs listed in Asia have strong potential. Until now they have been growing mainly because of local institutional investors taking exposure to their local equity indices, with the key underlying being China and Japan,” comments Marco Montanari, head of passive asset management, Asia Pacific at Deutsche Asset & Wealth Management. “Most Asia-based investors have only recently discovered the tax and time-zone advantages of investing in locally listed ETFs instead of US and Europe-listed products."

Global investors have also shown an appetite for Asian exposure. The number of non-Asia-Pacific-listed funds with international exposure has grown to 257, two-and-a-half times the number seen five years ago. Assets under management in these ETFs have risen to a record $61 billion.

Fred Jheon, head of beta products at Enhanced Investment Products in Hong Kong, gives his view: “The Asian ETF market, in terms of growth rate and inflows, has been commendable. However, this market is still nascent. There is still significant opportunity for growth in the region through offering more product breadth beyond country access ETFs, broadening distribution channels and improving liquidity providers on exchange.”

The massive growth in the number and complexity of ETFs, along with increased adoption by the institutional investment community, has created the need for a comprehensive and independent dataset that allows traders and investors to objectively measure ETFs from a performance and risk perspective.

Markit has developed an independent and dedicated ETF encyclopaedia that collates data on over 5,200 global ETFs. In January this year, the company launched a new web portal that provides full transparency into the global ETF market. It enables customers to undertake comprehensive and independent analysis drawing on 1,300 metrics to assess performance, liquidity, risk and benchmark tracking metrics for ETFs.

“We have one of the most comprehensive ETF datasets in the world,” says Litan Wang, vice president, indices at Markit. “Being an independent provider means that our customers come to us to analyse the performance of all the different ETF products.”

“The ETF market is fragmented, with over 141 issuers across the Asia Pacific region, listed on more than 20 exchanges. Add to this different investment styles and compositions, such as physical or synthetic, and it becomes difficult for ETF market participants to make comparisons,” says Singapore-based Brad Hunt, managing director and head of Information in Asia at Markit.

“Our analytics tools will enable investors to compare ETFs, research the ETF market and make informed decisions in a standardised way,” concludes Hunt.

Markit started providing data on ETFs eight years ago and customers include ETF issuers, managers and market makers as well as exchanges and custodians.

Hunt notes the firm serves the majority of ETF issuers in Europe and up to 90% of those in Singapore and Hong Kong.

“We have access to extensive ETF data which enables us to pull together all the information we need from issuers, their custodians or exchanges to compile our dataset. From this we can provide our customers with the analytics they need to contrast and make informed, objective decisions about the performance and risk characteristics of ETFs,” he says.

For more information on Markit's ETP data visit www.markit.com/Product/ETP.