Singapore Exchange sees phenomenal growth in ETF business

Keri Neo, Singapore Exchange

2020 was quite the year for the Singapore Exchange (SGX) and its ETF business, with 60 per cent growth in ETF assets over the year, to SGD8.6 billion, and a 2.5 increase in trading turnover.

Keri Neo (pictured), Head of Securitised Products at the Singapore Exchange, explains that SGX was an early adopter of ETFs, starting in 2001 with the first products cross listings of large US passive ETFs that tracked the major US indices. The following year saw the first locally domiciled ETF from State Street, tracking the local Singapore market.

In the next five years, SGX-listed ETFs were dominated by equities but State Street again proved the innovator, bringing its gold ETF GLD to Singapore in 2005, alongside the first fixed income ETF listed by NikkoAM. At that time, a number of European firms also started to expand their European Ucits offering to the Singapore market, giving them an easy route to making foreign investments.

Neo believes that there are three main drivers behind the recent growth in assets in ETFs on the exchange. “The institutional client use of ETFs is uplifted today,” she says. “Two thirds of the assets under management are held by institutional clients, who are a mix of local as well as more Asian-based institutions such as pension funds, insurance companies and endowment funds.”

They are attracted by the proposition of low-cost investment, she says. “Also, there are increasingly more and more innovative concepts which used to be in an active wrapper but are now available in a low-cost ETF that expresses an active strategy.”

There has also been a change in regulation that was brought in post the global financial crisis in Singapore that classified ETFs as complex financial instruments. 2015 saw them re-classified and made easily accessible again to general retail investors, Neo says.

Finally, Singapore has become something of a hub for fintech businesses which has in turn led to the rise of digital distribution platforms, robo-advisers, who are big users of ETFs.

Neo comments that across Asia, many of the personal finance models still involve commission-led financial advice, which limits the incentive for them to sell ETFs.

“Overall, it’s been a journey,” she says. “But we have come a long way and investors are more educated about low cost investing so the number of self-directed ETF investors buying ETFs has grown by 75 per cent over one year.”

The last five years have seen investors who hold ETFs grow by five times from a low base. “That will continue,” Neo says. “Investor awareness and knowledge of ETFs have overcome some of the challenges of pre-retail distribution review days. There are more reverse enquiries to banks because of the new awareness, so banks have ETFs and ETF selection teams, not just mutual funds but in order for banks to gain investor trust they have to incorporate more ETFs.”

In terms of launches over 2020, SGX saw a range of fixed income and equities ETFs and two China fixed income ETFs, listed in the last quarter of the year, raised SGD1.9 billion. “This was our biggest listing and a top ranking by global standards as well,” Neo says.

“It’s an interesting success story that we offer in Singapore because China fixed income is an over-the-counter market but because of index inclusion, it is becoming an increasingly important part of asset allocation and international clients are using them as a proxy to buy bonds.”

The exchange carries no active ETFs per se, but has smart beta products that use quantitative measures to achieve a factor or tilt, with income proving to be the most popular.

“It’s still early days for ESG here,” Neo says but the exchange has invested SGD20 million into a sustainability platform, SGX FIRST (Future in Reshaping Sustainability Together), a multi-pronged expansion of its sustainability capabilities and initiative. It has also just welcomed a new head of ESG, Herry Cho, Managing Director, Head of Sustainability and Sustainable Finance.

SGX says that, given its role in regional capital and financial markets, it can help facilitate collaboration within the ecosystem to catalyse change across its network, assets and expertise, with the initiatives spanning across asset classes including fixed income, equities, commodities and indices.

Neo reports that there is a line of ESG ETPs on their way at the exchange, but none listed at this point.

ETP providers who are considering a listing on SGX have five advantages, Neo says, with the top two aimed at European providers. Most importantly, Singapore recognises Ucits funds so it is easy to bring a Ucits product to Singapore and DWS and Lyxor have done exactly that. In addition to this, the exchange has a depositary setup with Clearstream, allowing market makers to move ETFs between European and Singapore markets. The exchange also offers multiple currency trading, in six different currencies, including the US dollar and Euro.

“A product listing here can be quite global,” Neo says. There is also a variable capital framework, launched in 2020, which is similar to the open-ended investment company structure in Europe.

Finally, Neo says that SGX commits to helping ETF providers raise assets when they list on the exchange.

“SGX supports fund managers in gathering assets under management and educating investors through the SGX Academy, which includes ETFs,” she says, having hosted two online seminars a month during the pandemic which have seen up to 500 attendees per session.

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