Retail investment in ETFs lagging in Asia-Pacific region

Market veterans say it's unclear how soon retail investors in the Asia-Pacific region could become a significant contributor to ETF market growth.

The dominance of "intermediated" bank and broker-driven distribution in the region — as opposed to the fee-based advice model ascendant in the U.S. — continues to inhibit the growth of the retail ETF market here, sources say.

None of the big bank platforms in Asia will be eager to distribute low-margin ETFs unless and until the products achieve significant scale, said Ken Yap, Singapore-based managing director, Asia, with Cerulli Associates Asia Pte Ltd. For Asia's huge, fragmented market, it's a "chicken and egg" problem, he said.

The dominant commission-based, bank distribution model leaves distributors with "no incentive to push ETFs," agreed Jackie Choy, Hong Kong-based director of ETF research with Morningstar Asia Ltd. And without a regulatory sea change in the direction of fee-based advice, it's hard to anticipate a catalyst that would unleash retail demand for ETFs anytime soon, he said.

In Japan, one veteran manager predicted institutional investors will continue to dominate the market. Growing appreciation of the flexibility ETFs provide in areas such as asset allocation should ensure institutional investors remain the driving force behind growth in demand, said Kohei Sasaki, Tokyo-based senior manager and head of ETFs with the marketing group, institutional sales division of Mitsubishi UFJ Kokusai Asset Management Co. Ltd. And while the rise of online securities companies now is creating an opening for ETFs, that movement in Japan now is probably similar to what U.S. markets were experiencing 10 years ago, he said.

Even so, some signs of progress have emerged. For example, a recent regulatory push in Australia to better enforce fiduciary obligations on distributors and advisers to act in the interest of clients has created a more receptive environment for ETFs there, observers say.

That changing distribution model has been one factor helping Australia's ETF market grow rapidly over the past year, noted Geir Espeskog, Hong Kong-based managing director and head of iShares distribution, Asia-Pacific at BlackRock Inc. According to Sydney-based ETF manager Betashares Capital Ltd., Australia's ETF market grew to a record A$50.9 billion ($35.7 billion) as of June 30, up almost 25% from the start of the year.

Similarly, Frederick Chu, the Hong Kong-based head of exchange-traded funds with China Asset Management (Hong Kong) Ltd., noted that moves last year by mainland authorities to tighten their grip on the country's fast-growing, loosely regulated wealth management products prompted a growing number of retail investors there to turn to ETFs, fueling a 50% surge in the market in 2018, and continued momentum year-to-date.

In another positive sign on the retail front, Ray Chan, Head of SPDR ETFs, Hong Kong with State Street Global Advisors, said the Tracker Fund of Hong Kong SSGA manages — at $12 billion still the largest Hang Seng-listed ETF 20 years after its debut — has seen the portion of its money coming from the territory's defined contribution system grow to 15% at present from below 2% in 2012.

The HK$900 billion ($115 billion) Mandatory Provident Fund's members can select the funds their retirement contributions are funneled to.

That points to a growing acceptance of low-cost ETFs as a tool to ensure sufficient retirement savings, Mr. Chan said.