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Asian ETFs show strong growth potential, says Cerulli

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ETFs in Asia are showing strong growth potential, with assets under management (AUM) rising gradually in key markets over the last few years, due to both market appreciation and inflows.

That’s according to Consulting firm Cerulli, which writes that almost all markets in Asia Pacific saw growth in their ETF AUM in the first half of 2018 over 2017 and, beyond that, when stock markets fared relatively well, such as in 2017, the growth rate of ETF AUM outpaced that of mutual funds. 

In 2017 and the first half of 2018, ETF AUM grew 35.7 per cent and 12.8 per cent, respectively, compared to that of mutual funds, at 12.8 per cent and 8.5 per cent, respectively.

In the first half of 2018, despite poor market performance at the start of the year, ETFs in most Asian markets have seen a healthy number of new listings and inflows, Cerulli notes. According to data from Broadridge, China, Korea, Taiwan, and India had total inflows of USD24.2 billion in the first half, compared to USD8.1 billion for the whole of 2017.

Japan has the highest market share for ETFs in Asia Pacific as of December 2017 at 61 per cent of AUM, followed by China (11 per cent) and Hong Kong (8.9 per cent). Cerulli writes that this can be attributed to stepped-up purchases by the Bank of Japan and the country’s prevailing negative interest rates contributing to equity ETF inflows. Taiwan had the highest growth in ETF AUM (46.2 per cent) over the first half of 2018, contributed by institutions such as insurance companies, which are increasingly fee-conscious.

According to Cerulli’s survey of managers in the region earlier this year, the main reason for developing ETF products is to meet clients’ demand for low-cost products, followed by the need to diversify their current product offerings. 

However, the firm writes that on the other hand, among managers reluctant to develop ETFs, their biggest reason is their strong conviction in active management. The second reason for managers to not consider launching ETFs is the poor performance of such funds in times of volatility, as was seen during the market correction in early 2018, which resulted in negative performances in markets such as China, Korea, and Taiwan.

Cerulli comments that ETF adoption in many Asian markets is still in its early stages, due to reasons ranging from less efficient markets and lack of liquidity, to limited providers and, most importantly, the commission-based distribution model. However, regulatory initiatives to deepen ETF markets, the emergence of robo-advisers using ETFs as underlying vehicles, and the gradual shift to a fee-based model are providing impetus to the market.

Cerulli believes that the story is not about active versus passive. Rather, both strategies are expected to play complementary roles, with ETFs used as supplementary tools in creating investors’ portfolios.

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