Exchange-traded funds could be next big leap in Asia – PwC

While exchange-traded funds have proven to be competitive investment products, with global ETF assets under management forecast to double to US$18 trillion by 2026, the Asia-Pacific region is expected to lag behind North America and Europe, according to new growth forecasts from PwC.

But there are fundamental ways in which fund managers can boost adoption of ETFs in the APAC region specifically, says PwC Hong Kong.

Asia-Pacific lags US and Europe on ETF growth potential

Since their introduction in the 1990s, exchange-traded funds (ETFs) have evolved from a niche investment option to become one of the most popular, competitive, disruptive and widely discussed product innovations in the asset and wealth management (AWM) industry.

Proven to be competitive investment products, with low-cost structures and performance that sometimes outstrips actively traded funds, ETFs have shown great resilience and growth potential over the last five years, and despite the market challenges, have emerged from the pandemic stronger than ever – strengthened by a surge in fund inflows, new entrants and product innovation.

Global ETF AuM almost tripled from US$3.4 trillion in 2016 to more than US$10 trillion in November 2021, and according to PwC, is expected to double to US$18 trillion by 2026.

Despite this, two-thirds of global executives surveyed by PwC expect total AuM in Asia-Pacific to reach just US$2-2.5 trillion out of this global total of at least US$18 trillion, according to growth forecasts in PwC’s report ETFs 2026: The Next Big Leap – a survey of 60 global executives, which together account for more than 80% of global EFT assets.

So, how can the APAC region accelerate growth of its ETF market?  How can fund managers boost adoption of EFTs? PwC Hong Kong analysis has identified a range of factors that are acting as drivers or brakes for the growth of ETFs in Asia-Pacific – from reimagining distribution to focusing on ESG and providing education.

Focus on thematic ETFs that track specific sectors

Thematic ETFs, those that track specific sectors such as technology, biotech and healthcare, have been the big winners in PwC’s global analysis, out-performing ETFs tracking a single geography or industry segment.

This highlights the importance of product development. “Fund managers need to predict areas of future demand and generate noise in the market to drive that demand,” says Keith Chau, Asset and Wealth Management partner, PwC Hong Kong, pointing to commodity-based ETFs, which for example “might be in demand at a time of geopolitical uncertainty”. 

ESG themes are most dominant

Of all investment themes, Environmental, Social and Governance (ESG) is the most dominant, with more than 60% of PwC survey respondents in Asia Pacific expecting to launch ESG-focused products in the next 12 months.

But while ESG is proving popular in terms of attracting new clients in the region, APAC still lags behind Europe by a couple of years in terms of demand – more than 90% of survey respondents in Europe expect to launch ESG-focused products over the same timeframe.

One challenge for fund managers across APAC is to identify suitable constituent stocks for an ESG-themed ETF. Apart from each stock having sufficient liquidity, there must be enough data available to support ESG claims in order to develop a credible product and avoid any accusations of greenwashing.

Distribution is key to driving investment in ETFs

According to PwC Hong Kong, the important component in order to drive investment in ETFs is distribution. In Hong Kong, retail banks have been the major force in the sale of mutual fund products, with a distribution network centred on a commission-based model. This may not be favourable for ETF products, so ETF providers may look to other channels, such as private banks and wealth managers, which are a significant source of demand for ETF flows in the US and Europe.

Hong Kong has yet to go down this route, but it is potentially an effective distribution channel for ETF providers. The new generation of investors are also far more comfortable with technology platforms; such platforms could be a game-changer for distribution of ETFs in the near future.

Investor education is needed to boost adoption

The final element to boost adoption of ETFs is investor education. The goal of investor education is usually to convey concepts such as a balanced portfolio, how much money is needed for retirement, or the cash flow characteristics of a particular product.

In the case of ETFs, there is a more pressing need to develop overall awareness of these products. While word-of-mouth recommendations can help promote interest, a concerted campaign of investor education would grow the market for ETFs across APAC. This would result in ever more competitive products that can address a wider range of investor preferences.

PwC report – ETFs 2026: The next big leap