As the exodus from active funds continues across the globe, passive index funds have gained traction, and exchange-traded funds (ETF) in particular have recorded significant inflows in recent years. Asia is part of this trend, with steadily growing demand for ETF products.
“Asia is a particularly interesting region for ETFs,” said Ian Banks, Head of HSBC Securities Services Asia (HSS). “At HSBC, we see investors and issuers facing challenges from varying market nuances. With the support of our strong Asia network and more than 15 years of experience in the Asian ETF market, we can connect clients with local market industry experts and be innovative together on new product developments.”
Mr Banks’ comments formed part of the welcoming address for Innovation in Asian ETFs – an event organised by the industry group Women in ETFs that provided an opportunity to discuss the latest developments in the ETF sector. He said that the focus on innovation has already borne fruit in terms of the new products that have come to the market.
A first for HK – leverage and inverse ETFs
One of the biggest developments for the Hong Kong ETF market in 2017 has been the introduction of the first-ever leveraged and inverse ETFs to track the city’s two main benchmarks – the Hang Seng Index and the Hang Seng China Enterprises Index. Designed to help active investors looking to capture short-term market movements, the leveraged ETF magnifies daily returns, while the inverse ETF products can be used as a hedging tool as it produces a return that goes in the opposite direction of the index it follows.
This new range of products was the subject of a panel discussion that brought together banking professionals, ETFs issuers, and market makers. Investors who use leveraged and inverse ETFs were also present to explain how the products fit into their investment strategy.
“In terms of my trading experience, I would say that the leveraged and inverse products give us a good fit for our clients because we aim for stable returns for our clients instead of looking for unreasonable returns,” said Andy Wong, Investment Strategist at Harris Fraser.
The issuers on the panel described the initial challenges to growing the assets under management for the leveraged and inverse ETFs. One of the major issues is that they are new products that the market needs to digest, which highlights the importance of educating both institutional and retail investors.
“One of the major challenges to grow the AUM comes from the AUM itself,” said Wang Xiao, Chief Coverage, Greater China, CSOP Asset Management, who said that once the AUM of an ETF tips over the minimum investment threshold of an investor, more investors will be able to buy into the product. “The ETF business can be like a snowball.”
Furthermore, many asset managers have internal rules to observe a new product’s performance – in particular, its performance and tracking error – for a set period of time before investing. On a similar note, institutional investors also tend to have lower limits on the size of a fund that they can invest in, which means that ETFs can remain out of bounds for investors when they are still in their infancy.
The role of fintech
The other main innovation covered during the event was fintech, and its potential role in solving problems relating to distribution – something that is particularly evident in Asia, where a commission-based advisory market tends to overlook ETFs. Robo-advisers are another fintech hotbed – automated investment platforms that use algorithms to provide advice to individuals.
A robo-adviser can be optimised by creating a platform that takes the best from both computer technology and human beings, said David Lee, the Managing Director of Hong Kong-based fintech firm Prive Financial.
On the technological side, this means automating the administrative aspects of the investment process and calculation. Increased efficiency is particularly evident when it comes to onboarding clients, as robo-platforms can help streamline KYC procedures. And when it comes to humans, there is empathy and the ability to discuss face-to-face the investment goals of a client.
“This is how robo-advisers can play a key role in distributing ETFs,” said Mr. Lee. “ETFs are highly liquid products. If you can provide access to ETFs in a way that nobody else is doing, by utilising automation in portfolio construction; you can digitise administrative tasks and spend more time understanding your client needs.”
"Other features of Robo-Advisor that help regularly draw clients back to the platform typically include third party account aggregation and the ability to set multiple investment goals in a simple fashion. This repeat traffic can in turn aid AUM growth for the wealth manager," said Zak Allom, Managing Director of Robo-Advisor, BetaSmartz.
The fintech discussion highlighted the way that technological solutions can promote the development of Asia’s ETF market – especially as a distribution channel. When seen alongside the new products being introduced in major markets, such as Hong Kong’s leveraged and inverse ETFs, it shows how innovation is driving multiple parts of the industry’s value chain. Taken together, they point towards a positive outlook for Asian ETFs.