Cerulli Associates reports ETFs are gaining favour in Asia

Singapore skyline at dusk

Reporting from Singapore, Cerulli Associates says Asia-Pacific ETF markets have seen record growth in recent years and are emerging as hotbeds of innovation.

Asia ex-Japan’s ETF assets under management (AUM) increased by 217.6 per cent since 2017 to reach USD422.3 billion in 2021, representing an impressive compound annual growth rate (CAGR) of 33.5 per cent over the five-year period, the firm says.

 

The technology sector led inflows to the region’s onshore ETF space in 2020 and 2021. In terms of underlying themes, the top ETF launches in 2021 in China included those tapping opportunities in internet, technology, infrastructure, and broad index products. In markets such as Korea and Taiwan, ETFs focused on technology, semiconductors, batteries, and the metaverse received positive responses.

 

The firm reports that product innovation is creating more investment opportunities and customer choices within the ETF market. According to the research, 83 per cent of managers in China, 67 per cent in Korea, and 60 per cent in India stated they are in the process of developing ETF products. ESG equity and new energy themes, as well as US equity and technology ETFs are themes gathering interest among Asia ex-Japan managers.

 

ETFs enable managers to gather assets through stock exchanges, the firm writes. As a result, securities houses that provide trading accounts are becoming a more important distribution channel compared to private banks. With the increase in direct securities trading and usage of ETFs, combined with tapping some active elements with mutual funds, securities houses are becoming much more flexible one-stop shops for distributing all financial instruments compared to banks.

 

Severe price competition is leading to consolidation in some markets, especially for simpler products such as ETFs with very few product differences, Cerulli says. Competition among asset managers to cut the total fees of ETFs is intensifying, as they give priority to gaining marketshare despite the possibility of lower profits. This could result in consolidation among the top ETF players as small and mid-sized ETF providers are pushed out, leaving end clients with fewer product alternatives.

 

In Korea, for example, the US ETF segment is gradually heading for oligopoly as it is led by Samsung Asset Management and Mirae Asset Global Investments, leaving little room for new entrants using the same US indices.

 

Similar fee compression trends are in play elsewhere in established ETF segments, such as Korean ETFs (tracking the KOSPI 100), Chinese ETFs (CSI 300), and Hong Kong ETFs (Hang Seng), since only the biggest players are best placed to harvest economies of scale and offer the lowest fees, the firm says.

 

“Continuing fee compression, especially in the more established areas where only the biggest players that are able to offer the lowest fees can survive, makes product innovation essential to establish competitive advantages in niche or untapped areas,” says Soo Ah Ran Cho, associate director. “These include offering access to megatrend themes such as disruptive technology and sustainable investing, which are sought by retail investors. Managers are keen to develop ETF products, and this will help expand the size of the region’s market and the opportunities within.”

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