Exchange-traded funds are big business globally—less so in Asia. What could deliver a meaningful boost to Asian ETFs? Robo-advisory platforms are a new funnel of assets into ETFs. ETF industry executives welcome this growth. They see it having the potential to serve as a major, sustainable source of assets.
“Robo advisors are putting together customized portfolios for individuals, and we’re starting to see small orders be aggregated through robo-advisory platforms,” said T.K. Yap, managing director and head of institutional trading and execution services at CGS-CIMB Securities in Singapore. “That’s a distribution-channel change.”
But robo is not yet a game-changer: robo advisors haven’t earned influence yet. That’s not just because robo is a new technology. It’s also because most assets going into Asia-based robo advisors are not flowing to Asia-listed ETFs.
ETFs are big business. ETF assets under management have grown by 1,400% since 2004, according to data from ETFGI, a consultancy. Today there are about 7,600 exchange-traded products listed around the world, representing nearly $5 trillion of assets. October 2018 was the 57th consecutive month of net inflows into ETFs.
The Asia portion is unspectacular: $550 billion of AUM, with 215 new listings so far in 2018 that have drawn in about $8 billion. But of that, Taiwan and Korea accounted for $6.4 billion, largely on the basis of their allowing leveraged and inverse ETFs; in Taiwan’s case, there has also been institutional demand for fixed-income ETFs.
For traditional long-only equity ETFs, assets in Asia Pacific, including Japan, Australia and Hong Kong, are unimpressive. (There is a separate, large domestic ETF industry in mainland China.)
That's a distribution-channel change
This is not to say that Asian investors are cool on ETFs. For many retail investors, ETFs are not readily accessible: investment products in the region are dominated by bank or broker distributors, who refuse to sell ETFs because there’s no commission to the sales team.
But for wealthier people with more options, or those savvy enough to engage independent online brokers, ETFs are popular. However, most Asian money goes to ETFs listed in the U.S. or, to a lesser degree, Europe.
“Most robos in Asia investing into ETFs use ones listed in the because they don’t like the liquidity on Asian products,” said Jermyn Wong, product-development director and ETF specialist at Nikko Asset Management in Hong Kong.
Industry players argue that investors are wrong to assume liquidity in locally listed ETFs is poor, but acknowledge that average daily volumes look unattractive compared to products in the U.S. This is especially true of ETFs providing exposure to U.S. securities.
“There’s a huge myth about liquidity based on ADV,” said Wong. “The real liquidity is that of the underlying securities.”
Viktor Ostebo, head of institutional trading at Flow Traders Asia, a market maker, said most of the region’s institutional investors—as many as 90% of them—favor U.S. listed products, despite higher fees, time-zone inefficiencies, and a high 30% withholding tax. “It doesn’t make sense,” he said.
There's a huge myth about liquidity
Yet portfolio managers and compliance departments continue to compare liquidity on ADV values, like stocks; it’s a metric that Asia-listed products can never beat.
Investors trading through robo advisors seem to be falling into the same habit, despite the fact that a recent study of costs, cited by a trading venue executive, show it’s often cheaper over time for Asian investors to buy and trade ETFs listed in Hong Kong or Singapore.
But market participants are skeptical the region’s robo advisors will behave differently than Asian pension funds, insurance companies, or private banks. As a result, the impact robo can have on ETF growth is positive but not decisive.
“I don’t think robo is going to be a big driving force,” said Ostebo.
And says an asset manager’s ETF salesperson, who declined to be named: “I don’t see robos as a major driving force for the industry in the next two to three years.”
Moreover, the Asian robo industry is already splintering, with a host of B2B providers designing products for banks or other clients, and a handful of B2C firms trying to grow assets within a diverse region. The upshot: whereas the U.S. has a handful of large, influential robo advisors such as Wealthfront and Betterment, Asia has lots of small players, none of which is likely to gain market-moving clout.
But the emergence of robo advisors over the past three years has created a new category of investor for private banks: it’s retail at a scalable level, rather than individual investors operating alone. This gives robo the potential to gradually acquire scale.
“Robo isn’t a major driving force by itself, but it’s part of one,” said Yap at CGS-CIMB. “It’s scalable. It will become bigger.”