Luke is part of a growing group of investors in Asia who are investing in ETFs. Low-cost, diversified and transparent, these products are becoming an increasingly go-to option for both retail and institutional investors, with the region becoming the fastest growing in the world.
According to independent research and consulting firm ETFGI, total ETF assets in Asia-Pacific ex-Japan grew nearly 15% in the first five months of the year to a record high of US$890 billion and are expected to grow 36% in 2023. Net inflows of US$118 billion in the period were the highest ever for the region and marked an unprecedented 35th consecutive month of inflows.
According to a recent report by PwC, the ETF market in Asia, including Japan, is currently worth more than $1.3 trillion and is expected to double in size to at least $2.5 trillion by 2028. This means Asia has the potential to become the world’s second-largest ETF market after the United States, with the strongest demand expected to come from retail investors, the report adds.
First introduced in the United States in 1993, ETFs pool together different securities that typically track an index or benchmark, aiming to deliver a return that matches the overall underlying market. Like other securities, investors can buy and sell ETFs through their broker at any time during market trading hours.
The Shanghai, Shenzhen and Hong Kong stock exchanges have added 85 ETFs to their northbound channel, through which foreign investors can buy mainland China-listed A-shares, and six ETFs to their southbound channel, through which mainland Chinese investors can buy certain Hong Kong-listed companies. The expanded ETF lists will take effect on July 22.
Institutional investors have long used ETFs as “building blocks” to execute their strategies, according to Antoine de Saint-Vaury, director and regional head of ETF sales and business development at Citi in Hong Kong. “This is starting to happen in the retail space too, and it’s becoming more and more popular.”
De Saint Voori added that major Asian markets such as China, Taiwan, India, South Korea, Japan and Australia have seen a “massive wave” of retail ETF adoption in recent years, driven by regulatory and industry efforts to promote ETF investment.
As ETFs emerge as the region’s most popular investment vehicle, global and domestic issuers are competing for the market, ranging from traditional passive index-tracking ETFs to novel actively managed thematic ETFs, catering to a variety of investor preferences.
“Institutions buy ETFs because they know they are cheaper, and they use them to pad their portfolios,” said ASIFMA’s Shen. “Individual investors can easily determine what to buy once they have done their research.”
“The breadth and depth of our product offerings, from indexing to active strategies across a range of asset classes including stocks, bonds, commodities and even cryptocurrencies, is key,” said Andy Ng, head of equity product strategy solutions for iShares at BlackRock. “We have over 1,400 ETFs across the globe.”
Asian investors don’t just want to invest in domestic products but also want global exposure, Ng said, adding that BlackRock is giving investors more choice.
“Local investors are familiar with these stocks and find them easy to understand, which means they can capture the demand for diversification,” Ding said.
Yongle Cho, chief operating officer at Mirae Asset Global Investment in Hong Kong, said the ideal thematic product is non-cyclical and has the potential for long-term, structural growth that could become a megatrend.
“The tremendous growth of ETFs seen around the world to date has been driven by passive ETFs,” Cho said, “but as ETFs continue to evolve and more institutional and retail investors adopt ETFs in their portfolios, use cases and demand will diversify and expand.”
As ETFs grow in popularity, they are quietly overtaking mutual funds: Last year, nearly $800 billion flowed out of mutual funds around the world, while $800 billion flowed into ETFs.
JPMorgan Asset Management, a traditionally active fund manager, is stepping up efforts to reinvent itself by converting mutual funds into active ETFs, following success in the U.S. and Europe as it seeks to replicate its expansion in Asia.
The idea behind active ETFs is simple: combine the benefits of passive index tracking to give investors exposure to a broader market, while also leveraging the stock-picking skills of a portfolio manager to identify and capitalize on mispriced securities.
This actively managed overlay is intended to deliver superior performance compared to pure index funds. The ETF structure maintains daily disclosure and intraday liquidity and allows for direct distribution to investors, eliminating the need for intermediaries.
“It’s like a more developed version of a mutual fund, and it’s a great vehicle,” said Philippe El Asmar, Hong Kong-based managing director and head of ETFs, direct and digital for Asia Pacific at JPMorgan Asset Management. “It’s more transparent, more liquid and more cost-effective than a mutual fund.”
He added that over the past few years, with a few exceptions, almost all portfolio managers have become accustomed to using ETFs to implement their strategies.
The shift highlights the pressures facing traditional actively managed mutual funds: Fewer than a third of U.S. mutual funds outperformed their passive ETF rivals on average over the 10-year period ending in December 2023, according to Morningstar research.
This poor performance undermines actively managed mutual funds’ biggest selling point: the promise of high returns that justify their high fees.The average expense ratio (the percentage of assets paid to manage the fund) for 2023 was 0.48% for passive ETFs and 1.02% for actively managed mutual funds, according to Morningstar.
“One of the factors driving the growth of ETFs is the structural decline in alpha generation from actively managed mutual funds,” said Hao Zhang, head of China business development at Mirae Asset Management. “As markets become more efficient, it becomes much harder to consistently beat the benchmark.”
To be sure, like any investment product, ETFs involve risks.
One common misconception is that passive management is inherently safer. Passively managed products that focus on a very small sector can be more volatile and riskier than broad index-tracked products, according to El Asmar. Actively managed ETFs can also carry their own risks if they deviate too far from their underlying benchmarks.
“So it’s really important that investors are aware and understand the differences between different types of products,” he said.
Luke, meanwhile, is very happy with the decision to move his portfolio into ETFs thanks to the bull market he’s invested in. He said he hopes to add more ETFs to his portfolio as he expands his investments over time.
“It’s nice to be able to go with the flow of the broader market without having to put in too much time,” he said.
CSOP’s Ding summed up that investors may not necessarily need professional help to manage their money: “When you have an investment idea, ETFs often provide the tools.”
