ETFs
As ETFs gain popularity, individuals take matters into their own hands while issuers rush to meet demand
Luk is part of a growing community of investors in Asia interested in ETFs. These low-cost, diversified and transparent instruments are increasingly becoming the preferred choice for retail and institutional investors in the fastest-growing region in the world.
According to ETFGI, an independent research and advisory firm, total ETF assets in Asia Pacific, excluding Japan, increased nearly 15% to a record $890 billion in the first five months of the year, on top of 36% growth in 2023. Net inflows of $118 billion during this period were the highest ever recorded in the region, marking 35 consecutive months of record inflows.
According to a recent report by PwC, the Asian ETF market is now worth more than $1.3 trillion, including Japan. It is on track to double in size to at least $2.5 trillion by 2028. This means that the market could become the second-largest ETF market in the world after the US, with the greatest demand expected to come from retail investors, the report added.
“In a market where investors are young, sophisticated and thinking more about what they buy, ETFs have become popular,” said Eugenie Shen, managing director and head of asset management at the Asia Securities Industry and Financial Markets Association (ASIA).Association of Electronic Engineering and Manufacturing Companies (ASIFMA)).
First introduced in the United States in 1993, ETFs are a basket of different securities that typically track an index or benchmark and aim to generate returns that match those of the overall underlying market. As with other securities, investors can buy or sell ETFs through their brokers at any time during a market’s trading hours.
This gives the product several advantages. Compared to individual stocks or bonds, an ETF offers investors broader market exposure through a single vehicle. And unlike mutual fundwhich typically require intermediaries such as banks to access, it eliminates the middlemen, thereby reducing costs for investors.
The Shanghai, Shenzhen and Hong Kong stock exchanges have added 85 ETFs in the northbound channel, which allows foreign investors to buy A-shares listed in mainland China, and six in the southbound channel, which allows mainland investors to buy some Hong Kong-listed companies. The expanded list of ETFs takes effect on July 22.
Institutional investors have long implemented their strategies using ETFs as “building blocks” of their portfolios, according to Antoine de Saint Vaulry, director and regional head of ETF sales and business development at Citi in Hong Kong. “This is starting to happen in the retail sector and is gradually gaining momentum.”
Major Asian markets such as China, Taiwan, India, South Korea, Japan and Australia have seen a “massive wave” of retail adoption in recent years, driven by regulatory and industry efforts to promote ETF investment, de Saint Vaulry added.
With ETFs becoming increasingly popular among investors in the region, local and international issuers are jostling to get their share of the pie. Their products range from traditional, passive, index-linked ETFs to actively managed and innovative themes, catering to the needs of a wide range of investors.
“Institutional investors are buying because they know ETFs are cheaper and they are using them to bulk up their portfolios,” ASIFMA’s Shen said. “Individual investors, when they do their research, can easily determine what to buy.”
Black rockAvant-garde and State StreetThe three largest indexing giants, which together control 66% of the $12 trillion in global ETF assets, also capture some of the largest shares of inflows into the region.
“It’s really about the breadth and depth of the products we offer, from indexing to active strategies across different asset classes like equities, fixed income, commodities and even cryptocurrencies,” said Andy Ng, head of iShares equity product strategy solutions at BlackRock. “We have over 1,400 ETFs globally.”
Ng said Asian investors are not only investing in locally domiciled products but also want global exposure, adding that BlackRock is giving them more options to choose from.
“This could be a winner-take-all industry, and for early entrants who already have an established presence, people tend to naturally gravitate toward them,” said Ding Chen, CEO of CSOP Asset Management, a Hong Kong-based fund manager with $14.7 billion under management. The firm launched the ETF CSOP Saudi Arabia in Hong Kong, Asia’s first ETF that tracks the Gulf nation’s largest companies. “The competition is intense, for sure,” she said, adding that the key is to focus more on local and regional opportunities. For example, NvidiaThe ‘s rise is leading to spectacular rallies in Asian chip companies such as Semiconductor manufacturing company in Taiwan And Samsungand some of the CSOP ETF products that track these stocks have seen strong inflows.
“Local investors are more familiar with these names, so they understand them more easily. This means we can meet the demand for diversification,” Ding said.
Mirae Asset Global Investmentsa South Korean firm with $250 billion under management, says the firm’s team of ETF researchers looks at the broader economy and markets to identify long-term growth themes.
An ideal thematic product would be non-cyclical, with long-term secular and structural growth potential that could become a megatrend, said Youngrae Cho, chief operating officer of Mirae Asset Global Investment (Hong Kong).
K-pop companies, lithium battery manufacturers, Japanese real estate investment trusts that invest in hotels and commercial facilities, and Chinese companies “little giants” – companies eligible for preferential treatment to help the country become a stronger technology power – are among Mirae’s ETF themes.Many ETF products track chip stocks like Nvidia. Photo: AP Photo
“The phenomenal level of growth we’ve seen so far globally in the ETF space has been driven by passive ETFs,” Cho said. “But as ETFs continue to grow and more investors, both institutional and retail, adopt them in their portfolios, the use cases and demand will diversify and expand.”
The growing popularity of ETFs has seen them quietly supplant mutual funds. Last year, nearly $800 billion left mutual funds globally, while ETFs attracted $800 billion in investments.
JPMorgan Asset Management, traditionally an active asset manager, has stepped up its efforts to reinvent itself by converting mutual funds into active ETFs. The firm, which has seen success in the United States and Europe, is aiming for similar growth in Asia.
The idea behind active ETFs is simple: They combine the benefits of passive index tracking to give investors exposure to the broader market, while leveraging the stock-picking skills of portfolio managers to identify and capitalize on mispriced stocks.
This active management aims to generate outperformance compared to a pure index fund. The structure of the ETF allows it to benefit from daily publication and intraday liquidity, which also allows direct distribution to investors and eliminates the need for intermediaries.
“It’s like taking the development of a mutual fund further; it’s a superior vehicle,” said Philippe El-Asmar, managing director and head of ETFs, direct and digital for Asia Pacific at Hong Kong-based JPMorgan Asset Management. “It offers more transparency, more liquidity and better returns than a mutual fund.”
In recent years, almost all portfolio managers, with a few exceptions, have become more comfortable using ETFs to implement their strategy, he added.
This development underscores the pressures facing traditional, actively managed mutual funds. Take the U.S. for example: Less than a third of mutual funds outperformed the average of their passive ETF competitors over the 10-year period through December 2023, according to a Morningstar study.
That underperformance undermines the main selling point of active mutual funds: their promise of higher returns that justify higher fees. The average expense ratio, the percentage of assets paid to manage the fund, was 0.48% for passive ETFs and 1.02% for actively managed mutual funds in 2023, according to Morningstar.
“One of the factors driving ETF growth is the structural decline in alpha generation by active mutual funds,” said Hao Zhang, head of China business development at Mirae Asset. “As markets become more efficient, it is very difficult to consistently beat benchmarks.”
Of course, like any other investment product, ETFs carry risks.
There is a common misconception that passive products are inherently safer. According to El-Asmar, a passive product focused on a very narrow sector can be volatile and risky compared to a broad-based index product. Actively managed ETFs can carry their own risks if they deviate significantly from the underlying benchmark.
“So it is very important that investors are aware and understand the difference between the different types of products,” he said.
Luk, meanwhile, is quite pleased with his portfolio shift to ETFs, thanks to the bullish trend in the markets he has invested in. He said he will look to add more ETFs to his portfolio as he grows his investments over time.
“I’m happy to follow” the market as a whole without having to devote too much time to it, he said.
CSOP’s Ding sums it up by saying investors don’t always need professionals to help them manage their money. “When you have an investment idea, ETFs can often provide the tool.”