ETFs listed in the Asia Pacific region, excluding Japan, reached record highs in assets in December 2018, reports ETF data providers, ETFGI.
“I do think that Asia is the new frontier when it comes to popularity of ETFs,” says Philip Yeo (pictured), International Head of Product Development and Management and Joint Global Head of the ETF business at Nikko Asset Management.
In the region, assets reached a record high of USD197 billion, beating the previous record of USD191 billion, which was set at the end of the previous month.
2018 saw ETF assets in the region increase by 15.6 per cent. ETFs in Japan also saw record asset inflows in 2018, with USD72.4 billion flowing in, easily beating the 2017 record of USD52.6 billion. December was the 14th month of consecutive net inflows for the country.
The Bank of Japan famously supports Japanese ETFs and purchased
USD7.05 billion of ETF assets during December, bringing total ETF purchases to approximately USD212 billion, according to ETFGI.
“Our experience has been that demand for ETFs in Asia is growing strongly and will only continue for all the same reasons that ETFs have grown in the US and Europe,” says Danny Dolan, managing director of China Post Global. “If you look at the growth of ETFs in Asia, it has been outpacing that of mutual funds for several years now.”
The drivers behind the growth, both in the broader region including Japan, and in the Asia Pacific region, are varied. Certainly, the development must partly come from the huge campaign of education that the larger ETF providers have undertaken in the region.
“The reason is two-fold,” Yeo says. “ETF issuers such as ourselves have been doing a lot of groundwork and education with investors and investors are now waking up to realise they are useful as a tactical asset allocation tool.”
There has however, been a certain reluctance to use them, particularly from asset managers who have been trained to develop their bottom up stockpicking skills and perceive ETFs as merely collective passive tools in the investment armoury.
However, their lower cost nature, combined with dealing through the day and transparency continues to make them very popular.
“There is much more selectivity in terms of where investors choose to spend their management fee budget,” says Dolan. “There is still a place for active management certainly but investors are more demanding and more selective so will now put a greater proportion into passive funds as portfolio building blocks and maybe allocate a portion for more expensive active funds, where they add value as a kicker rather than as their entire portfolio as was the case for many investors five or 10 years ago.”
In many cases, ETFs are being used as complementary to active funds, side by side in a portfolio for market exposure.
Nikko Asset Management started in Japan, is now very active in Singapore and is hoping to expand into Hong Kong in the near future.
In Singapore, Nikko has had significant success with the Regular Savings Plan vehicle, which encourages investors to save monthly into savings products. Originally, these were unit trusts but recently the programme has been adapted to allow for monthly investment into ETFs.
Yeo says: “The Regular Savings Plan has been very successful for us. Some of our ETFs, like Nikko AM Singapore STI ETF, the first product that went onto the programme in 2013, now has more than 50 per cent of assets from regular savers.”
And in terms of institutional use, The Bank of Japan is leading the way, having started a programme of buying Japanese ETFs in 2010.
2018 saw it buy a record JPY6 trillion (USD52.9 billion) in ETFs to support a nervous market, feeling the fall-out from economic slowdown, and the difficult relations between US and China.
If the Nikkei index moves down, the Bank of Japan appears to boost it back up again with ETF purchases, but this level of support leaves some commentators concerned that it couldn’t sell off its holdings even if it wanted to.
However, its methods seem to be working with the Nikkei index up to a 27 year high in October. And some observers believe that investors are coming back to Japan in their own right.
Yeo says: “In Japan, ETF growth comes from government efforts, not just The Bank of Japan buying ETFs, but also a function of what Abe is doing to promote Japan as a growth centre. Investors are saying: ‘If I want Japanese equity, instead of the usual modus operandi of investing into an actively-managed Japanese equity fund, can I use Japan equity ETFs?’ just to get a piece of Japanese economics.”
And ETFs are also attracting attention in China. Dolan says: “Big Asian institutions are using smart beta ETFs, as in the China Public Employees State Pension Fund, the second largest in the world after Japan, with USD800 billion in assets, which announced in 2017 that they were only going to use smart beta strategies for China A shares exposure in future.”
Dolan reports that Asian institutional investors such as insurance companies are increasingly using ETFs as they become more fee conscious and cost control becomes a larger part of what they do.
The figures show that investors the world over are beginning to realise that the cost of active management has become onerous, particularly when they achieve lower returns.
A 2018 Morningstar survey reported the average fee charged by active and passive funds through time, finding that every year, fees tend to decline in aggregate.
The firm writes that this decline comes mostly from investors selling high-fee, active funds and moving their money to low-fee passive funds.
As Morningstar points out, fees on passive funds have also continued to decline, but at a slowing rate, as they begin to approach zero, concluding:
“As fees approach zero, it will become increasingly difficult for fee declines to continue.”
But it might explain a large part of the growing success of ETFs in Asia.