Asia-Pacific exchange-traded fund (ETF) markets have seen record growth in recent years and are emerging as hotbeds of innovation. Asia ex-Japan’s ETF assets under management (AUM) increased by 217.6% since 2017 to reach US$422.3 billion in 2021, representing an impressive compound annual growth rate (CAGR) of 33.5% over the five-year period.

The technology sector led inflows to the region’s onshore ETF space in 2020 and 2021. In terms of underlying themes, the top ETF launches in 2021 in China included those tapping opportunities in internet, technology, infrastructure, and broad index products. In markets such as Korea and Taiwan, ETFs focused on technology, semiconductors, batteries, and the metaverse received positive responses.

Product innovation is creating more investment opportunities and customer choices within the ETF market. According to the research, 83% of managers in China, 67% in Korea, and 60% in India stated they are in the process of developing ETF products. Environmental, social, and governance (ESG) equity and new energy themes, as well as U.S. equity and technology ETFs are themes gathering interest among Asia ex-Japan managers.

ETFs enable managers to gather assets through stock exchanges. As a result, securities houses that provide trading accounts are becoming a more important distribution channel compared to private banks. With the increase in direct securities trading and usage of ETFs, combined with tapping some active elements with mutual funds, securities houses are becoming much more flexible one-stop shops for distributing all financial instruments compared to banks.

Severe price competition is leading to consolidation in some markets, especially for simpler products such as ETFs with very few product differences. Competition among asset managers to cut the total fees of ETFs is intensifying, as they give priority to gaining marketshare despite the possibility of lower profits. This could result in consolidation among the top ETF players as small and mid-sized ETF providers are pushed out, leaving end clients with fewer product alternatives.

In Korea, for example, U.S. ETF segment is gradually heading for oligopoly as it is led by Samsung Asset Management and Mirae Asset Global Investments, leaving little room for new entrants using the same U.S. indices, as noted in the research. Similar fee compression trends are in play elsewhere in established ETF segments, such as Korean ETFs (tracking the KOSPI 100), Chinese ETFs (CSI 300), and Hong Kong ETFs (Hang Seng), since only the biggest players are best placed to harvest economies of scale and offer the lowest fees.

“Continuing fee compression, especially in the more established areas where only the biggest players that are able to offer the lowest fees can survive, makes product innovation essential to establish competitive advantages in niche or untapped areas,” said Soo Ah Ran Cho, associate director. “These include offering access to megatrend themes such as disruptive technology and sustainable investing, which are sought by retail investors. Managers are keen to develop ETF products, and this will help expand the size of the region’s market and the opportunities within.”