Bright outlook seen for take-up of ETFs in Asia

WEALTH managers in the Asia-Pacific are expected to drive flows into exchange-traded products and funds, particularly through fee-based advisory and discretionary portfolio services, said Robert Fairbairn, BlackRock global head of retail and iShares.

The rise of multi-asset funds which invest into ETFs is also set to drive demand. Multi-asset funds have grown in popularity thanks to Asia's appetite for income.

To date, allocation into ETFs and ETPs among Asian investors has lagged behind the US. BlackRock manages a total of about US$4.4 trillion in assets as at March 2016, of which roughly 66 per cent or US$2.9 trillion were in index assets and iShares.

Based on BlackRock data for end-2015, in terms of listing region, the US accounts for US$2.1 trillion or 72 per cent of ETP assets. Europe's share was US$511 billion or 17 per cent, and Asia's came to about 8 per cent or US$243 billion.

Mr Fairbairn said: "The predominant provision in terms of asset management services through wealth management platforms (in Asia) historically has been brokerage - selling mutual funds and being paid by front-end loads and retrocessions.

"In that environment, it's hard to sell ETFs - they are effectively mutual funds sold through the stock exchange. The amount of money that the platform commands from ETFs is vastly reduced - it's really just the commission spread.''

ETFs typically mimic a market benchmark, and management fees are a fraction of actively managed funds. A number of other trends have driven adoption in mature markets. One is the banning of product commissions in markets such as Australia and UK. Earlier this year, the US Labor Department issued a fiduciary rule that advisers for retirement accounts must put clients' interests first. This means greater scrutiny on fees and unnecessary expenses.

Mr Fairbairn said the practice of charging a fee to manage a portfolio "creates a powerful environment for ETFs and passive management''. "You can't just charge a 1 per cent fee and do nothing. The focus on underpeforming active managers goes up. You try to be more efficient about fees and that leads you to turn to ETFs as the core of a portfolio.''

The typical argument against index funds in Asia is that markets in the region are relatively less efficient and so lend themselves to active management. Mr Fairbairn said that isn't necessarily the case today. "Asian markets are pretty deep and big. Some of our largest tickers invest in Asia. The emerging markets ticker invests in all the small markets and it's hugely important.''

Meanwhile, he expects a number of innovations to drive growth. One is the emergence of "smart beta" funds that set out to target certain exposures such as lower volatility, for example, to deliver certain outcomes for investors. iShares minimum volatility funds eschews the higher beta stocks with the aim of delivering overall lower volatility than the index.

Smart beta contributed US$29.6 billion to global ETP flows in 2015. So far this year, minimum volatility iShares ETFs have attracted some US$12 billion.

Another new area is impact investment ETFs. The iShares Sustainable MSCI Global Impact ETF invests in companies that derive their revenues from products and services that address social and environmental challenges. The fund, launched in April, has US$14 million in assets.

Mr Fairbairn also sees opportunities in fixed income ETFs. Liquidity in the bond market has dried up signficantly particularly in the corporate bond market since the financial crisis. "ETFs increase liquidity in fixed income markets.

"They're incredibly efficient, very low-cost and offer reduced spreads. If you have a portfolio of high yield bonds, you pay up to 1 per cent in spread, custody costs, monitoring and coupon collection costs. You can buy one ticker that gets you a broad exposure for 8 basis points in spreads.'' High yield ETPs saw flows of US$8.6 billion in 2015 compared to US$3.8 billion in 2014. At end-2015 high yield corporate ETPs had assets of about US$48 billion.