Global ETF assets seen doubling
The assets under management of exchange-traded funds globally are forecast to double to $5trn, with Asia offering fragmented opportunities, according to a survey report by PwC.
ETF product innovation is not generally viewed as an immediate priority in Asia due to the immaturity of the markets and regulatory hurdles, the report said.
This is in contrast to the global findings where 46% of the firms surveyed said new types of indexing (also referred to as “smart beta”) represent a “hotbed of product development activity”.
In Asia, lack of experience and talent were identified as factors that hold back the successful development of innovative products.
Apart from this, the distribution landscape and the commission-driven sales channels post a major barrier for the growth of ETFs.
“Distribution remains a challenge in Asia, exacerbated by the fact that many markets are closed with only a limited number of Asian ETFs cross-listed in other markets in Asia,” the report highlighted.
“In addition, Asia’s commission-driven sales channels form a hurdle when it comes to effective distribution of ETFs, where the traditional distributors are less keen to promote products which don’t generate sufficiently high revenues for them.”
Nonetheless, opportunities are emerging, said Justin Ong, Asia-Pacific asset management leader at PwC Singapore.
“Despite these challenges, opportunities abound for existing ETF sponsors as well as other asset managers willing to develop a thoughtful and informed strategy as they prepare to address the Asian market.
“However, as more types of investment strategies become operationally feasible and are permitted by regulators, firms will need to develop and retain deep expertise, differentiated products, investor education, and effective distribution channels to achieve success with their ETF offerings.”
The competitive landscape in Asia differs from one country to another. For example, ETF providers in China, Japan and Korea are dominated by domestic firms, whereas Singapore and Hong Kong markets are dominated by large global ETF sponsors.
However, recent market-linkage initiatives such as fund passporting and the Shanghai-Hong Kong Stock Connect could contribute to opportunities in the ETF space, the survey found.
“Fund passports could have a profound impact on the success of ETFs in Asia. For example, the ASEAN passport for Malaysia, Singapore and Thailand, operational since August 2014, means retail funds (including physical ETFs), can be offered directly to investors in any three of these markets,” the report said.
Around 91% of respondents believe that the regulatory environment will have a significant impact on the growth and innovation of ETFs over the next few years.
“Shifts in the regulatory environment will continue to produce opportunities that will favor firms with local market knowledge,” said Nigel Brashaw, global ETF leader at PwC.
“The ability to transform ETFs into effective solutions that address the needs of specific investor segments will be a particularly important factor in competing successfully.”
New regulations could spark further growth if they permit more product innovation or lower distribution barriers, but they could also dampen demand, particularly if new tax rules make ETFs less tax efficient, the report said.