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ETFs Expand Rapidly in Asia

Flows into Asia-Pacific equity ETFs reached $19.3 billion in the first quarter of 2020, almost double the figure in the same period of 2019. Overall net inflows of all exchange traded products listed in the region reached $24.6 billion in the quarter.

Asia’s overall ETF market has been artificially buoyed by the Bank of Japan’s purchases of ETFs as part of its stimulus measures. That trend is set to reverse now that the BOJ is looking to unload its ETF holdings. But beyond Japan, growth is being driven by growing awareness in the region of the benefits of ETFs, such as the ability to cost-effectively gain exposure to particular sectors through thematic ETFs.

While Asia’s ETF market remains relatively underdeveloped compared to that of the US, it is generating substantial interest and Hong Kong in particular, boosted by its linkages to mainland China, is jockeying to position itself as the region’s leading ETF hub. The Hong Kong stock exchange announced in May it would waive trading tariff and settlement fees on fixed income and money market ETFs. And In June, it also announced its first-ever ETF listings in Hong Kong and Shanghai under the new Hong Kong-Mainland ETF Cross-listing Scheme announced in 2020.

GlobalTrading spoke with three experts on Asia-listed ETFs about the market’s growth and potential.

Jean-François Mesnard-Sense, Head of ETF Capital Markets, Asia Pacific, State Street Global Advisors

Firstly, it is noteworthy that Asia-listed ETFs attracted more than USD 75 billion net inflows in 2020, a 65% increase from 2019, which shows that ETFs are rapidly growing in the Asia region. I believe the growth observed in ETFs listed in Asia is only the tip of the iceberg. Secondly, Asian institutional investors have the options of trading ETFs listed in the United States (US ETFs) and Europe (UCITS ETFs). Historically, US ETFs have been favored by Asian investors due to the larger variety and greater liquidity on exchange. We have also seen an increasing demand for UCITS ETFs as Asian investors consider some of the benefits of UCITS ETFs, such as potential tax and reporting efficiency.

Fixed Income, Thematics and ESG in Focus

There were more than 280 new ETFs launched in Asia Pacific in 2020, more than the US and Europe combined. Although the net inflows are still skewed towards Japan-listed ETFs with the Bank of Japan playing an important role, it is worth noting that there is an increasing interest in fixed income ETFs, thematic ETFs and ESG ETFs among Asian investors in recent months.
With many exposures still not available locally, we see ETF issuers looking to launch new ETFs in Asia. We also see institutional investors, such as asset managers and insurance companies, trading US ETFs or UCITS ETFs. The UCITS structure are also attractive to private banks and wealth managers in the region and we are seeing growing demand as these intermediaries seek to expand their discretionary portfolio management options.

Rimmo Jolly, Head of iShares Asia Pacific at BlackRock

Across the region, we continue to see increasing adoption and usage of ETFs among institutional clients across a variety of use cases, driven by the need to diversify and search for yield. Insurance clients, in particular, have shown strong demand for ETFs in both their investment linked and general accounts. With the new launches of thematic ETFs in the region around technology, healthcare and China exposure, there has been some pick up from retail investors as well.

For example, we launched the iShares Hang Seng TECH ETF last year which now exceeds US$1.1 billion in assets under management within nine months – the fastest ever for us in the region. Meanwhile, Asia investors are increasing the volume around sustainable investing since last year and we have identified more than 40 new ESG ETF users in the region across all client segments.

Finally, despite concerns over rising yield levels and spread compression earlier this year, the trend of adopting fixed income ETFs persists with the proven advantages of liquidity, transparency and ease of trading.

Demand from Outside Asia

Offshore capital is coming into Asian local trading hub ETFs for a variety of reasons and through a diverse group of end users. For example in Hong Kong, investors across APAC and Europe are able to access both onshore and offshore China exposures in the most direct and cost efficient manner. We’ve seen investors continue to allocate to China onshore through large cap China A50 access both in terms of strategic allocation and for a source of diversification to global equities. We have also seen tremendous inflows into offshore China sectors like technology as investors look for growth and more precision base allocation vehicles.

Increasingly, market participants share the view that climate risk is investment risk, and BlackRock clients from around the world recently reported plans to double their sustainable assets over the next five years with climate change highlighted as the most prominent sustainability issue. As a result, BlackRock has launched new products to provide compelling ESG equity offerings.

Phillip Yeo, International Head of Product Development and Management and Joint Global Head of ETF Business, Nikko Asset Management

In Singapore, most of the demand is coming from domestic investors. However, we do see an increasing interest from overseas institutional and corporate investors from across the Asia Pacific region. The ecosystem of brokers, investors, traders and market makers within Asia is growing well. We believe that interest from outside Asia will automatically follow when Asia’s ETF ecosystem deepens. Asia is always of interest for investors outside the region because of her vibrant economic growth. And ETFs are the most efficient way for foreign investors to trade into or out of their intended exposure.

Providing China Bond Exposure

We believe there would be growing interest in our NikkoAM-ICBCSG China Bond ETF (BB ticker: ZHS.SP) listed on the SGX in October 2020. Through this ETF, investors in Asia now have low-cost, convenient access to China RMB Bonds. China Bonds are of interest because of their generally higher yields and also for the RMB exposure. With the growth of the Chinese economy and increasing market accessibility, China’s bond market is evolving into an asset class all by itself. The ETF invests only in investment-grade Chinese government and quasi-government bonds. This eliminates corporate credit risk.