- 2018-11-12
Fee model will boost the Asia-Pacific ETF market
While US regulators are worried that the exchange-traded fund (ETF) market may grow too fast, their Asian counterparts, asset management companies and distributors are busy considering what else can be done to increase investor interest.
This summer, the scale of assets managed by US ETFs surpassed the US$3 trillion mark, and the assets managed by the Asia-Pacific ETF industry only managed to climb the US$350 billion mark.
From 2015 to 2016, the US ETF market grew by 20%, while the Asian market only expanded by 10%. Analysts said that from two perspectives, it can be seen that the size of the Asian ETF market is less than that of the United States and Europe: the latter's market size is twice that of Asia, and the size of the ETF's assets under management is US$716 billion.
The first is to treat Asia as a market that has proven to be repelling fast-growing markets that require major structural and regulatory changes before they take off. The second is to see the possibility of sudden upside surprises.
Experts from major asset management companies said that the difficulty in assessing the potential of Asian ETFs lies in the fact that the Japanese market has an excessively large share of the region and the Bank of Japan has played an excessively large role. The Bank of Japan buys 6 trillion yen ($54 billion) of ETFs every year, which distorts the market.
According to Nomura Securities, the scale of assets under management in the Japanese ETF market is US$200 billion, which is about US$50 billion higher than the total size of all other ETF markets in the Asia-Pacific region. At the end of August, the market value of ETF assets held by the Bank of Japan was $175 billion.
Through the ETF purchase program, the Bank of Japan indirectly holds 10% of the equity of about 22 large Japanese companies and holds about 3% of the entire Japanese stock market. Some criticized this as a "de facto nationalization" of the Japanese stock market.
At the same time, there are other factors constraining the Asian ETF market. Some skeptics worry that these factors will hinder the development of the retail market.
For example, there are clear differences in the way the US and Asia promote products to investors. In Asia, a large percentage of funds (some estimate 90%) are commission-based. This is not good for ETFs because they are publicly traded on stock exchanges and structurally inconvenient to pay commissions to banks, brokerages or financial advisers who may recommend them, which is different from the mutual fund industry in the region.
The active ETF market will depend on the development of a fee-based distribution network. Fidelity International (Fidelity International) Asia Pacific managing director Mark Talbot (Mark Talbot) said that the distribution infrastructure is inhibiting retail demand.
"In the regions where ETFs are growing (the U.S. and Europe), there is a huge ecosystem of financial advisors," he said. "You need a model that relies more on advisors. But when you see people pay for advice (instead of paying commissions) Before, it was difficult to imagine when it would take off."
He added that in the United States, at the time of the rise of ETFs, there were many registered investment advisors in the market, and they had the motivation to choose lower-cost products for their customers.
Tao Bohong pointed out that Japanese regulators are encouraging a fee-based sales model, introducing new fiduciary rules and other measures, which will enhance the low-cost attractiveness of ETFs.
Regulators in other countries will learn from the success or failure of the Japanese model.
Elsewhere, Australia has recently introduced reform measures to improve fund pricing transparency, which has promoted the rapid growth of ETFs.
Marco Montanari, head of passive asset management in the Asia-Pacific region of Deutsche AM, also believes that the distribution system must be fundamentally reformed before the Asian ETF market reaches a higher level.
Montanari said: "Australia has performed well and it has flourished after switching from a commission model to a fee model. This will be a game changer in the Asian ETF market."
Susan Chan, head of iShares Asia Pacific at BlackRock, said that ETFs are more popular with institutional investors in the region.
She said that the retail business "has not been in a short start, with mixed good and bad." She said that all countries in the Asia-Pacific region have a lot of work to do, adding that the case of Australia proves that regulatory changes can make a significant difference in terms of attracting retail interest.
She said: “All regulators are considering doing this, and improving transparency is always welcome. But whether it can be done is another matter. Regulators are talking about improving transparency and reducing costs, but there is little progress in legislation.”
Even if Asian countries have introduced regulatory measures to promote the booming ETF market in other countries, there are still other obstacles. For example, Montanari said that most of the products offered to Asian investors are linked to stocks in the domestic market, so ETFs are not used to allow investors to invest domestically in foreign markets.
Yan Pu, head of Asian portfolio review at Vanguard, suspects that Asian product structure may hinder the development of ETFs. For example, Asian ETF companies offer a large number of equity ETF products, but few fixed-income products. She pointed out that in the United States, fixed income ETFs are growing rapidly.