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New study finds Asian institutions driving ETF growth

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Low cost investing and the rise of the robo-advisory model in Asia are causing a number of traditionally active fund houses to ramp up their passive capabilities, including strategic beta, a new study finds.

The research from Cerulli Associates in Asia, finds that some product manufacturers are not in favour of passives and often base their arguments on two things. The firm writes that firstly, firms believes that greater alpha can be generated in less efficient equity markets such as Asia, versus developed markets. Secondly, Asia's mostly commission-driven distribution model hampers the popularity of passives, which offer little or no sales incentive.

With regards to the first argument, Cerulli's findings reveal that active funds investing in Asia Pacific ex-Japan and global emerging market equities have delivered little to no alpha over various time periods. As for the second argument, Cerulli agrees with manufacturers that distribution has been a key hurdle for passive funds, which are still playing catch-up with their active cousins in terms of size and flows. In addition, the demand for passive funds varies across markets – apart from Japan and Australia, China was the only market which captured a double-digit share of passive assets under management last year, with the Southeast Asian markets commanding a miniscule share of assets.
 
Anecdotal feedback suggests that institutions are driving passive investing in most Asian markets. A clear example is the Bank of Japan, which has been buying ETFs and stocks as part of its quantitative easing program to spur the domestic economy. This, in turn, has spurred interest from retail investors. Regulators in Hong Kong and Singapore have also issued guidelines on leveraged and inverse ETFs to broaden their ETF offerings.
 
Cerulli notes that in the long run and across Asian markets, passive product development and demand will likely continue to rely on regulatory and institutional initiatives.
 

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