As Exchange Traded Funds (ETF) continue to dominate global fund flows, assets under management (AUM) are nearing the US$5 trillion mark. Hong Kong, having led the development of ETFs in Asia Pacific over the years, has recently ceded ground to other markets in the region.
- The U.S. has retained its leadership position in ETFs AUM.
- In APAC, South Korea is leading with the highest number of ETFs, followed by Japan, China and Australia.
- Unique and in-depth datasets are key to building and launching well-differentiated index-linked products quickly and in a cost-efficient way.
Given this development, Refinitiv hosted a workshop in Hong Kong for industry experts to review the outlook for the city’s ETF market, highlight the various challenges limiting growth, and outline opportunities, ideas and techniques to rejuvenate the sector – all with an eye towards helping the ETF market in Asia’s so-called ‘world city’ regain its leadership position.
Worldwide, ETFs continue to attract an outsized share of inflows, although AUM in passive funds remain a fraction of the size of active funds. The U.S. has retained its leadership position in AUM terms with APAC bringing up the rear, even behind Latin America, although AUMs grew across all regions. U.S. and Japan equity funds are attracting the most inflows while outflows mainly affect Europe and China equity funds.
In APAC, South Korea is leading with the highest number of ETFs, followed by Japan, China and Australia, according to Lipper. Hong Kong is in fifth place ahead of only Taiwan and India among the region’s major markets.
EFTs Casting a long shadow
One of Hong Kong’s biggest draws for foreign investors is its role as an access point to Mainland China’s massive capital markets. This role has only been magnified as China has pressed ahead with market reforms via a range of mutual market access programs, and as China stocks and bonds have earned inclusion in some global indexes.
On the other hand, even as the market reforms and index inclusions rouse interest in index-linked products, on the focus on offering ETFs investing in China’s markets to the exclusion of nearly everything else is a mistake that is hurting Hong Kong’s opportunity to become a regional hub, warned the panel discussing Hong Kong’s ETF market outlook.
The need to diversify
Pointing out that about two-thirds of ETF AUMs in the city are either related to Hong Kong or China or both, the panel argued for greater diversity in the ETF product range.
For instance, APAC has only seen 220 product launches in 2018 compared to 319 in North America. A greater variety of products, combined with Hong Kong’s tax advantage, can draw investors across Asia – a region with US$30 trillion worth of investable assets – away from other markets, especially the US, the panel noted.
There is significant potential for innovation and an opportunity to make the city as competitive as other ETF hubs in the region, panelists agreed. The proliferation of products in markets such as Europe and the US make it hard for them to innovate and bring new products to market, the experts pointed out. Fortunately, this is a problem that Hong Kong does not yet have, and issuers need not be overly creative to distinguish their offering.
The panel mentioned that Environmental, social and governance (ESG) and thematic (such as AI, Biotech, Batteries, etc.) ETFs have been the most popular type of products to be launched in 2018. Deborah Fuhr, managing partner at ETFGI, observed that there is an increasing number of studies showing a positive correlation between companies that embrace Environmental, Social and Governance (ESG) principals and stock performance, ultimately rewarding their investors.
Challenges to growth
The delay in the launch of the much-awaited ETF Connect, which is viewed as a potential aid to innovation and an ideal way for Hong Kong ETFs to become globally competitive, is also seen hindering growth. Investors are hedging their bets while they remain unsure of the types of products to develop for ETF Connect and await clarity around its scope.
It is also crucial to educate retail investors in the region and increase their participation, which currently lags far behind that of institutional investors, the panelists noted.
The panel also urged ETF providers and investors to be more accepting of fund closures and not view them as failures. Comparing the ETF industry to the IT sector, participants observed that the process of investing capital productively is a long and iterative one involving experimentation.
Leveraging Data Sets
In a session discussing the ideal ways to get a passive investment strategy to market, Philippe Shah, Director, Indices & Benchmarks Asia Pacific, Refinitiv, observed that access to unique and in-depth datasets are key to building and launching well-differentiated index-linked products quickly and in a cost-efficient way.
Refinitiv, Shah pointed out, can help in this regard by allowing ETF providers the ability to develop their own unique methodologies using global pricing and analytics datasets, and have Refinitiv calculate, administer and distribute these indices on their behalf.
Summing up the overarching message from the workshop, Simon Lee, Head of Institutional Business, CSOP Asset Management, said: given our collective ETF know-how & experience in Hong Kong, “…we have a significant advantage over our competitive ETF jurisdictions in Asia. Let’s make the most of it.”