Last updated: July 15, 2012 4:33 am

ETFs unlikely to soar in Asia

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The exchange traded fund market in Asia will not follow the same evolutionary path as the US and European markets, according to Mark McCombe, chairman of BlackRock’s Asia Pacific business.

The developed ETF markets “provide pretty much everything people need”, he said in an interview with FTfm.

Asian institutions, such as hedge fund managers, are more likely to use established international products that offer deeper liquidity and a low tracking error. “No one will come and say they would prefer to buy a local product; it just doesn’t work that way because the majority of flows in Asia remain institutional,” said Mr McCombe.

The market for locally manufactured ETFs in Japan was “quite small [$44.4bn AuM, according to BlackRock data] relative to the overall size of assets in the country”, he said. “The reason for that is, big institutions that want access to ETFs can buy the international product.”

Retail investors might be interested in buying ETFs, but are unlikely to be sold them as the Asian investment fund market is driven mainly by the upfront commission available to banks and other distributors. ETFs generally do not pay such commission.

Banks would advise customers who ask about ETFs they can buy them online. “But if you ask what you can buy, they would sell you a mutual fund,” said Mr McCombe.

The ETF market in China was unlikely to develop overnight, he said. It would do so “if it had deep capital markets, a liberal currency regime and capital account, and people could use ETFs as in America for hedging and cash management ... ”

With regard to BlackRock’s ETF strategy in Asia, Mr McCombe said the group would focus on the global product where it made sense, and develop local products where it needed to do so for regulatory or commercial reasons.

ETFs listed in Asia ex Japan have $67bn of assets under management, compared with almost $1.2tn for US ETFs.

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