China’s Growing ETF Footprint

April 15, 2019

In the world of ETFs, Greater China is still a relatively small player, accounting for only 2.1% of the $5.1 trillion in global ETF assets. But the region, comprising three markets—Mainland China, Hong Kong and Taiwan—promises rapid growth ahead, even if ETF adoption still varies significantly by region.

The inside look into how investors are choosing and using ETFs in Greater China comes from Brown Brothers Harriman (BBH), which has co-sponsored with ETF.com a global survey of professional investors, including financial advisors and institutional investors for six-consecutive years. The last two years offered a focused look into Greater China.

Mainland China In Driver’s Seat

In a nutshell, the Asia-centered assessment of ETF usage found that drivers of adoption are unique to each market, but Mainland China is the engine driving that growth.

The number of those allocating to ETFs in mainland China has practically doubled since last year, and 77% of those surveyed say they plan to increase allocations in the next 12 months—a higher number than the 63% of investors looking to up ETF usage across the broader China region.

“Growth in the region is closely aligned with Mainland China, which presents a significant opportunity as the onshore asset management industry continues to mature and internationalize,” the report said. “Hong Kong is well positioned to capitalize on this growth, while Taiwan has been one of the fastest growing ETF markets across Asia with a high level of product innovation.”

Today 63% of investors surveyed in Mainland China allocate at least 25% of their assets to ETFs. In the Greater China region, that adoption rate sits at 38%—results that show “ongoing education efforts around the structural benefits of the ETF wrapper seem to be resonating,” the survey said.

 

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ETF Selection Not Centered On Cost

Another interesting find this year is on how investors in different parts of the region are choosing ETFs. The selection process is anything but uniform when it comes to what matters most to investors.

For example, in Mainland China, where index methodology used to be the No. 1 factor in the process of picking an ETF, investors say that today their top focus is split between two factors: index and ETF issuers—the brand.

Perhaps even more interesting is that cost (expense ratio) ranks at No. 7 for these investors—way down in the list of their top selection criteria.

By contrast, in Hong Kong and Taiwan, the ETF issuer behind a fund is nowhere among the top three most important factors in selecting an ETF. Instead, in those two markets, it’s historical performance that drives ETF choice.

And again, when it comes to cost, in Hong Kong, fees are at No. 3, but in Taiwan, they are the last thing investors look at. That’s significantly different than in the U.S. and Europe, where expense ratio is one of the top factors determining adoption. In Greater China, cost doesn’t seem to be too much of a concern.  

“The emergence of historical performance may come as a surprise to those who subscribe to the conventional wisdom that cost is the single most important criteria for ETF selection,” the report said.

“As ETF adoption by retail investors in Greater China is still at a nascent stage, perhaps investor sensitivity to fees is less acute than in other regions,” the report added. “When compared with regional mutual funds, ETFs on the higher end of the expense ratio—such as active or smart beta ETFs—still often present a significant cost value.”

 

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