Over the past 10 years, the proportion of funds invested globally in passive strategies such as Exchange Traded Funds (ETFs) has been steadily increasing. The shift from active to passive strategies most pronounced in equity. In the US, the proportion of passive stock market investments has doubled from just under 20 per cent in 2006 to just over 40 per cent in 2016.
Investors are increasingly attracted to cheaper funds and ETF have typical expense ratios that are a tenth of their mutual fund peers. The proportion of investors’ assets in funds with expense ratios of less than 20bps have doubled from 20 per cent in 2004 to 40 per cent in 2014. This is with reason, numerous studies have shown the expense ratio of a fund is a strong indicator of fund performance – the lower the fee, the better the fund tends to perform.
The ETF market in Asia-Pacific has grown steadily as well though still lags behind Europe and is further still from the US. In Singapore, despite a sound regulatory framework, vibrant financial service sector and a relatively wide choice of ETF products (around 80 listed on SGX), trading volumes of ETFs are low. Total Asset Under Management of ETFs traded on SGX in 2016 was just above $3 billion or 0.1 per cent of ETF AUM globally. In comparison, Singapore’s GDP as a proportion of global GDP is four times higher. For a prominent financial centre, one would expect assets invested in a staple investment product such as ETFs to be more significant, particularly relative to the economy at large and given the rise in popularity of ETFs in other international markets.
This suggests that there is much room for the ETF market in Singapore to grow with potentially significant efficiency gains to be accrued by investors by switching to ETF alternatives. For instance, if a fifth of funds currently invested in mutual funds in Singapore were to be invested in ETFs instead, cost savings in differential expense ratios alone (conservatively assuming a 50bps differential) would amount to around $60 million per annum.
In the past six months, two new REIT ETFs have been launched on SGX. In comparison, smart-beta ETFs are gaining traction globally but remain relatively unknown and unused in Singapore. While many traditional ETF products are market-cap weighted passive stock indices, smart-beta products offer alternative investment strategies such as alternative indexing methods or asset classes.
The jury is still out on smart-beta though more innovation in the ETF space and sexier products that capture the fancy of local investors should help boost growth. There are of course other hurdles to overcome, the lack of willingness to distribute ETFs by banks and investor education, a space where fintech players such as robo-advisors could make a significant impact.
( Arisa Siong is Head of MINNLAB, Marvelstone Group)
ETF Asia Forum is an industry event aimed at identifying ETF opportunities in Asia. Held on the 30th March at fintech hub LATTICE80, it provides a venue for the meeting of fintech and ETF players. Central themes for discussion include leveraging on fintech to drive ETF growth and index innovation. For more information, please visit: www.etfasiaforum.com