Analysts remain positive despite tough times

PUBLISHED : Monday, 09 September, 2013, 12:00am
UPDATED : Monday, 09 September, 2013, 12:48am

With the notable exception of Japan, Asia's ETFs this year have shown performance that is far from stellar - the three largest Asia-Pacific equity ETFs listed in the United States have all lost money on a year-to-date basis.

The same could be said for Hong Kong's Hang Seng Index-tracking Tracker Fund, and the largest ETF following Chinese A-shares - the FTSE China A50.

Despite the haphazard showing, investors seem unable to stay away. Up until the beginning of August, the Asia ETF market saw its assets under management grow by 14.1 per cent on a year-to-date basis to HK$155.1 billion, according to figures from Deutsche Bank's db X-trackers.

In Hong Kong, assets in ETFs listed in Hong Kong rose to HK$32 billion at the end of June, compared to HK$24.3 billion during the same time last year, according to consultancy ETFGI. And that's only the domestic market. Frank Henze, managing director and head of SPDR ETFs for APAC at State Street Global Advisors (SSgA), says the market for non-domestic ETFs investing in Asia is probably as big as the market for domestic ETFs.

Funds are flowing into Asia ETFs despite the poor performance because they are being used by institutional investors for strategic asset allocation and portfolio diversification and completion purposes, rather than retail investors chasing returns.

"What we have is a very strong underlying current of more and more investors looking to buy into ETFs to cover market exposure, for tactical allocations, and to complete their portfolios," Henze says.

People are buying ETFs in droves because they are liquid, provide easy access, and cheap - factors which will continue to drive growth.

Marco Montanari, regional head of passive asset management at Deutsche Asset and Wealth Management, points out that this was especially the case since the Asia ETF market was still comparatively small.

Right now, there are more than 500 ETFs listed in Asia, but this figure was still less than half that of the US and less than a third of the European market, he says.

Another growth factor in Asia lies in the fact that retail participation is low compared to more mature markets. Whereas in the US retail investors make up around 50 per cent of the ETF market, in Asia the figure is estimated to be between 10 and 15 per cent, Montanari says.

This would be further boosted by the continuing liberalisation of China's economy, which will allow more foreign investors to access its market, and the development of fixed income ETFs in Asia.

While some ETFs are linked to major mainland indices, there is still a lack of product choice for ETFs linked to niches such as small caps or specific industrial sectors.

For Asia, one area Montanari sees growth is in fixed income. "Right now, there are very few fixed-income ETFs [in Asia]. I expect them to be as big a success as equity ETFs have so far been for the region," he says, adding that more Asian countries are getting investment-grade status - a previous hurdle because many regulators require it before allowing fixed-come products to be launched.

Besides China, Montanari expects other frontier markets in Asia, such as Pakistan, Philippines and Vietnam, to experience significant boosts in coming years.

Todd Rosenbluth, director of ETF research for S&P Capital IQ, says he is positive on US-listed ETFs focusing on China, Hong Kong and Japan.

On the other hand, he advises investors to exercise more caution for ETFs connected to Indonesia and India.

Henze believes institutional investors will continue to play a more significant role in the growth of the ETF sector in Asia.

In particular, he points to the fast-growing wealth management sector, with asset managers continuing to launch ETF portfolios and tactical asset products - all using ETFs as underlying.

In addition, he sees institutional investors diversifying their use of Asia ETFs into broader applications from current strategic asset allocations to more flow-driven applications, such as transition management and cash equitisation.

Finally, continuing improvements in exchange trading technology across the Asia-Pacific region will help to reduce costs and improve trade executions - further boosting the regional ETF markets, he says.

Henze expects continued growth in both Asia domiciled and overseas ETFs.

"With more clients coming to use ETFs in Asia, there is a great demand and need for local products which are domiciled in Hong Kong, Singapore and other local markets.

"You've got more and more clients coming to the market who are more comfortable buying domestic products at domestic exchanges," he says.