Another strong year for strategic-beta ETPs in the Asia-Pacific region

14 September 2017   Category: News, Asia, Australia, China, Global, Hong Kong, Japan, Korea, Malaysia, Singapore, New Zealand   By Jackie Choy*

Three years ago, Morningstar introduced our naming convention and taxonomy for the fast-growing universe of strategic-beta exchange-traded products, or ETPs. Each year onwards, we provide an update on the state of the strategic-beta ETP landscape.

Jackie Choy

It was another strong year for strategic-beta ETPs in the Asia-Pacific region. Collective AUM swelled 57% to US$16.9 billion from $10.8 billion during the 12-month period ended June 2017. This translates to a fivefold growth in three years since we published the first edition of this guide. Contrary to the pattern observed in the prior two years, growth during the 12-month period ended June 2017 was more broad-based from a geographic perspective. Most countries in the Asia-Pacific region experienced double- or even triple-digit growth in AUM. Strategic-beta ETPs in Singapore grew the most in percentage terms (180%), albeit off a tiny base and owing to the addition of a locally domiciled strategic-beta ETP. Japan-domiciled strategic-beta ETPs once again grew the most in absolute terms, adding $4.9 billion to their aggregate AUM.

The driving force behind the strong growth in strategic-beta ETPs in Japan was the Bank of Japan’s announcement in July 2016 that it would double its rate of ETF purchases to an annual pace of 6 trillion yen (US$53 billion) as part of its ongoing monetary stimulus programme. Exchange-traded funds (ETFs) tracking the JPX-Nikkei Index 400, a strategic-beta benchmark that homes in on quality stocks, were eligible under the ETF purchase programme. Furthermore, the programme also included an annual amount of 300 billion yen to purchase ETFs which own shares of firms that are proactively making investments in physical and human capital.

In light of the Bank of Japan’s ETF purchase programme, Japan easily secured its top position in the Asia-Pacific league tables in terms of AUM. Australia remained in second position within the region. Australian strategic-beta ETPs saw AUM grow 60% in the 12 months through June 2017, driven by inflows into new and existing products. South Korea remained in third place, experiencing 10% growth in total assets.

In terms of strategic-beta ETP market maturity, New Zealand’s strategic-beta ETP assets account for 12.0% of its local ETP market assets, followed by Australia at 10.0% (up from 8.4% as of June 2016). Malaysia’s 5.4% was significantly increased from 1.7% as of end-June 2016, but the country’s overall ETF market remains very small.

Inflows into strategic-beta ETPs remain strong in the Asia-Pacific region, thanks in large part to the ongoing inflows into Japan-domiciled ETFs tracking the JPX-Nikkei Index 400. In the 12 months to June 2017, $4.0 billion of net inflows went into strategic-beta ETPs (excluding those domiciled in China), of which 75% went into quality strategies (mainly from ETFs tracking the JPX-Nikkei Index 400). The number of strategic-beta ETPs grew to 134 from 118 during the same period (again, excluding those domiciled in China, or to 147 from 131 including those domiciled in China).

The growth of strategic-beta ETPs has continued to outpace that of the overall ETP market. As a result, strategic-beta ETPs’ share of the overall ETP marketplace has further increased to 4.3% as of June 2017 from 3.5% as of June 2016.

Quality on Top

Exchange-traded products tracking quality-oriented indexes continue to hold the top position among the subcategories of strategic-beta ETPs in the Asia-Pacific region, with a market share of 62%. The 16 quality-oriented ETPs listed in the region have collective AUM of $10.5 billion, of which 98% came from the nine ETPs domiciled in Japan. Exchange-traded products tracking the JPX-Nikkei Index 400 further dominate the list of top-ten largest ETPs by assets. In fact, the top five positions are occupied by these ETPs. Dividend-screened/weighted strategies are the second-largest sub-category of strategic-beta ETPs, followed by multifactor strategies, which account for 17% and 13%, respectively, of the region’s total strategic-beta ETP assets. As of June 30, 2017, there were 39 and 26 ETPs in these two sub-categories, respectively, making them the most popular types of strategic-beta ETPs by number.

*Written exclusively for Asia Asset Management by Jackie Choy, CFA, director of ETF research, Asia, at Morningstar Investment Management Asia Limited