Cris Sholto Heaton reviews the major developments in the Asian ETF market over the last fortnight.

Competing For Indians’ Savings

What does it say about a country when most local ETFs are dedicated to gold? Perhaps that investors fear its record of high inflation and aren’t convinced that the government has got control of public finances. That’s certainly true of India, which explains why providers clearly think gold ETFs are a long-term winner there.

With seven firms already competing for a share of this market, the country’s two largest private sector banks are now pitching in as well. ICICI’s investment joint venture with the UK’s Prudential has just launched a second ETF – the first being an equity tracker for the Sensex index – while a rival offering from HDFC marks its first move into the ETF market. However, with total expense ratios of 2.5%, both could struggle to make an impression. Fees tend to be higher in the Indian ETF market than in most countries, but this is still more than twice the going rate on the cheapest existing gold trackers.

Investment firm Motilal Oswal has taken things in a slightly more interesting direction with its new MOSt Shares M50 fund. This is the first fundamentally weighted India ETF listed locally and only the second worldwide after Wisdom Tree’s India Earnings Fund in the US. The underlying index that will be rebalanced on fundamentals is the Nifty large cap benchmark and the fund has a total expense ratio of 1.5%.

India now has a total of 24 ETFs, a sizeable number for an emerging market, although these mostly consist of gold and broad equity market trackers. More diversity is in the pipeline, notably a range of sector trackers from Benchmark Asset Management, the biggest player at present. But ETFs have yet to catch on strongly with local investors.

The most popular fund by some way is Benchmark’s contribution to the gold line-up, which has around US$200 million in assets under management, followed by the same firm’s money market and Hang Seng products, each with around US$70-US$80 million under management. Turnover in most Indian ETFs remains very low.

Most retail share investors are still opting for traditional mutual funds, as pushed by advisers who receive commission on sales. In the case of gold, physical bars, coins and jewellery, traditionally worn at weddings, remain much more significant than ETFs. Paradoxically, despite the uncompetitiveness of their new products, firms like ICICI and HDFC could make a difference to the growth of the industry if they’re able to use their extensive banking networks to promote ETFs as an alternative way to invest.

Japan And Korea – Still Isolated

Nikko Asset Management has listed an MSCI Japan tracker on the Tokyo Stock Exchange, the country’s first for that benchmark (previous local ETFs have been based on the Nikkei or Topix indices). Its total expense ratio is 0.16%.

In Korea, Woori Asset Management has expanded its Kosef range to include the Enhanced Cash ETF, a money market fund. Details were not readily available in English at the time of writing.

These launches take Tokyo’s total exchange-traded product listings to 93 and Korea’s to 60. But despite having the two largest markets by listings in Asia, in many ways Japan and Korea remain quite isolated from the broader global ETF industry. The vast majority of Japanese products come from local firms such as Nikko, Daiwa, Nomura and Mitsubishi-UFJ. Apart from ETF Securities’ enthusiastic cross-listing of its commodity trackers, foreign involvement in the market is limited to one or two products each from iShares, BNP Paribas, State Street and Samsung. In Korea, virtually all products come from firms such as Samsung, Mirae and Woori.

And while the involvement of the big global ETF firms is low, local heavyweights seem equally disinterested in expanding outside their home market, echoing the general failure of their local financial giants to make a splash globally. This is somewhat frustrating for foreign investors, since both markets feature a wide range of sector and style ETFs on their local indices that can’t be accessed through any other markets.

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