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The Asian outlook for exchange-traded funds remains bright as the industry continues to test unchartered grounds in the product universe, industry leaders told finews.asia. 

ETF suppliers continue to maneuver through a difficult market environment marred by unprecedented uncertainty and record-high economic contractions, most notably not only via continued asset growth but greater diversified adoption.

Advocates of active investing have long called out the concentration risks involved with the fixated nature of replicating the same indices en masse, to which the industry has responded with the creation of «smart beta» products – ETFs that select underliers based on rules other than the share of market capitalization.  According to an ETFGI report, global assets in smart beta ETFs and other exchange-traded products grew 35.1 percent from $618 billion to $835 billion in the first 11 months of 2019 – a five-year compound annual growth rate of nearly 20 percent. 

«Smart beta is gaining traction as investors increasingly shift away from active managers to seek other ways to enhance risk-adjusted returns,» said Chris Pigott, head of Hong Kong ETF services at Brown Brothers Harriman (BBH). «Of course, the issue about smart beta has always been about track record but we haven’t heard too much negative feedback despite recent volatility.»

FI Growth Story

Innovations aside, fixed income has been the major growth story for the ETF industry in recent times. At Blackrock, for example, fixed income ETF inflows reached $112 billion last year, or 47 percent of total global market share. Asia has been no exception not only to replace regular fixed-income allocations to individual bonds or active managers due to weakened risk appetite but also for other more versatile use. 

«We saw more tactical allocations, more transitionary trades and other use cases as demand drivers behind the increasing use of fixed income ETFs,» Pigott said, highlighting short-duration bond ETFs as a popular cash management solution and a notable trend in the region.

«Indices of Sin»

Despite the optimism, criticisms against cap-weighted risk in ETFs are further amplified in this asset class where the biggest borrower is rewarded with the biggest allocation to the index, popularly dubbed «indices of sin». This is a recipe for disaster when economies face huge distress, not unlike the current one fuelled by an ongoing coronavirus pandemic.