SGX eyes bigger slice of the booming ETF market pie

Singapore

AMID a booming exchange-traded fund (ETF) market elsewhere in the world, Singapore Exchange (SGX) is trying to get into the party.

It has rolled out educational campaigns with brokers and waived clearing fees for a period. At the same time, it has allowed investors to trade more ETFs on the SGX platform without having to be qualified to do so.

Industry players say it is still early days, and the biggest challenge is investor education. This year, however, more retail clients are trading and volumes are rising.

"Everyone believes Asia will follow the same trends as seen in Europe and the US. The question is in what way SGX will participate," said Luuk Strijers, head of securities products at the exchange.

Mr Strijers said that with future industry changes such as fee-based advisory platforms and robo-advisers, more investors could turn to trading the product.

Globally, the amount of money parked in ETFs - almost US$3 trillion - overtook assets invested in hedge funds at the end of June, according to research firm ETFGI. Assets under management (AUM) for ETFs have increased dramatically from just US$74 billion in 2000.

In the United States, the largest and most liquid market for ETFs, investors traded US$18 trillion worth of ETFs over the past year, Bloomberg noted in July. This is almost nine times their AUM, and already more than the US gross domestic product, Bloomberg said.

South Korea's financial regulator, meanwhile, said in October that it will allow pension funds to invest in ETFs as they offer supposedly safer and higher yields in a low-rate environment.

In Singapore, ETF-traded value in recent months has been just S$200 million to S$300 million a month. This means SGX revenue from ETF trading is negligible. Each S$100 million of ETFs traded bring S$32,500 in clearing fees and S$7,500 of access fees for SGX.

While lauded for their low management fees and liquidity, ETFs are not suitable for all investors, private bankers say. They recommend ETFs for short-term trades in large and efficient stock markets such as the US.

"Certain ETFs allow you to get into markets quickly," said Neo Teng Hwee, chief investment officer of UOB Private Bank.

But they argue that clients looking for better long-term performance - by definition, higher returns than the index benchmarks that ETFs passively track - should turn to actively managed mutual funds.

Credit Suisse Private Banking and Wealth Management's head of Asia Pacific funds and ETFs Rodolphe Larque said: "If the client says, 'I want a very active fund to potentially deliver me alpha over the business cycle, I have a long-term view, this is my theme for the next one year plus', then here is your truly active fund."

"If the client comes to us and says, 'I see China rebounding in the next two to three days, I want to participate in China as a market, I don't want to play any particular stock', then definitely an ETF, I won't recommend a mutual fund for that."

In the ETF industry's favour are a raft of studies that have found that the performance of passive, low-cost ETFs beat that of the average mutual fund in the long term.

Yet customers at retail banks are still getting pitched mutual funds.

"Frankly we do not have much queries on ETFs from our clients . . . interest hasn't been as strong as traditional investments like mutual funds and bonds," said Gregory Choy, OCBC Bank's head of wealth advisory.

Asked whether mutual funds are really in clients' best interests, Mr Choy said fund selection is key: "Choosing a manager with a good track record to consistently deliver results that beat the benchmark becomes a big consideration for us."

The active-versus-passive debate aside, industry players say the local ETF market is still underdeveloped.

With 87 ETFs listed on SGX, they say the issue is not product choice. Rather, the problem lies in the lack of investor knowledge, within an industry structure that does not promote ETF sales, they say.

For example, bank relationship managers are incentivised to advise clients to buy mutual funds, which provide distributors with front-load sales charges and also trailer fees from fund managers.

Another reason why Singapore's ETF scene is sleepy is that the US market is overwhelmingly dominant and far more liquid. Many products listed here are already listed in other more vibrant exchanges, industry players note.

Given how some ETFs here do not trade regularly, investors hesitate to trade them as they worry that they might not end up paying fair prices, they say.

There could be a misperception.

"This perceived liquidity issue is not necessarily correct because market makers create the liquidity in any case," said Credit Suisse's Mr Larque. "I don't really see ETFs in Singapore trading at significantly higher bid-ask spreads than anywhere else."

For irregularly traded ETFs, Mr Larque suggests that SGX can work with market makers to create a reference trade every day, so investors can see how much the asset would otherwise be priced through a time period.

In Asia, Singapore has also been overshadowed by Hong Kong, where popular ETFs listed there allow investors to take positions in a volatile China market, through A-shares listed in China or H-shares listed in Hong Kong.

"It's been slow. If I were giving the ETF industry here a scorecard, it wouldn't be particularly good . . . (it's) 'room for improvement'," said Kevin Hardy, BlackRock's country head of Singapore and head of beta strategies in the Asia-Pacific.

BlackRock, dominant in the global ETF space, lists the popularly traded iShares MSCI India Index ETF only on SGX. Future ETF products could include lifecycle funds that adjust one's asset allocation over time, products that are oriented towards yield, or products with a home bias, Mr Hardy said.

Regulation mandating fee-based advice over commission-based advice, which has happened in the UK, could also give the ETF industry a boost, he said.

One unique selling point of SGX ETFs is that they allow investors to trade Asian markets while those markets are open, said Sam Manchanda, head of South Asia passive investments at Deutsche Asset & Wealth Management. Deutsche Bank provides the largest suite of ETFs on SGX through its DB X-Trackers products.

"We have clients in Europe, with the same product cross-listed in Europe and Singapore, they trade the Singapore one," Mr Manchanda said.

Another idea thrown up was having an ETF tracking the local real estate investment trust (Reit) market, which offers yields of 6-8 per cent. "A Reits ETF could be interesting, there are 30 Reits in Singapore. We are always in discussion with issuers," SGX's Mr Strijers said.

However, investors need not hold their breaths for an S-Reits index ETF.

"The focus for now is on educating and getting people aware of the benefits, which results in product expansion at some point. We're afraid if we expand the product shelf too quickly now, the focus on the product itself might be lost," Mr Strijers said.

Product manufacturers say ETF trading in Singapore does have potential.

Sunny Leung, ETF business development manager at State Street Global Advisors, highlighted the city's well-developed financial services and regulatory infrastructure and reputation as a regional wealth management hub. "These market characteristics, combined with high levels of financial literacy among its population, will fuel the continuous adoption of ETFs in the Singapore market," he said.

State Street offers the SPDR STI ETF here, one of two ETFs on SGX tracking the benchmark Straits Times Index.

"We have already observed an upward trend in the Singapore ETF market in terms of asset size and number of participating institutions," Mr Leung said. "We have also seen increasing use of ETFs among family offices, intermediaries, such as private banks, financial advisers and platforms, as well as retail investors through share-building plans."

For Christopher Tan, CEO of boutique retirement planning firm Providend, the biggest challenge around ETFs is for financial advisers to manage client emotions, as ETFs can be more volatile than mutual funds.

"It takes huge conviction to recommend ETFs. You make lesser fees at the onset and there's more work to do to manage the short-term risk," he said. "And once you have done that, your next biggest challenge is to be able to risk-coach your clients, so that they don't jump out at the wrong time."

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