Exchange traded funds (ETFs) in Asia are still a relatively underdeveloped business. Although Hong Kong saw its first ETF in 1999, the products have only really found favour with investors since the financial crisis. Meanwhile, in the US and Canada – the latter being where the products originated – ETFs have already been around for about 20 years and in large volumes. The global business is worth $1.39 trillion annually, and Europe, like North America, is a well developed market.
Market participants say assets under management in Asian ETFs account for only about 6% of the global total. The more mature European and US markets have a large number of providers offering ETFs in several countries, while the Asian market is more fragmented – for example, Hong Kong has 13 firms selling ETFs but few of them offer ETFs also out of Hong Kong. This means local competition is intense among the many ETF product providers trying to get a share of the rapidly growing Asian market.
Unlike the US, and more similarly to Europe, growth in the Asian market is less driven by retail and more by institutional investors. Some people estimate that 80% of ETFs in Asia are bought by institutional investors, with retail investors accounting for 20%. Whereas, in the US, retail comprises 50% of the market. Asia’s breakdown is considered similar to that of Europe. Many institutional investors use ETFs to make tactical asset allocations, the rationale being they can react quickly and gain exposure when they see an opportunity or trend in the market. ETFs are also relatively cost-effective employed in this way. Meanwhile, for emerging markets, ETFs provide a quick and cheap way to access those markets that are otherwise difficult to access and in which individual stock-picking is tricky.