Investors in Asia Pacific who see exchange-traded funds as safe low-cost proxies for market performance may have been rudely surprised in recent weeks. It looks like not all is rosy in Asia’s increasingly crowded ETF garden.
The simple story of using ETFs as a proxy for capturing Asia growth is straightforward and appealing. HSBC noted in January that ETFs “drive Asia’s growth momentum”. The clear implication is that the region’s ETFs are no longer just beneficiaries of its growth but agents in supporting that growth.
But in June, Lee Chan-jin, governor of South Korea’s Financial Supervisory Service, issued a public apology for apparently hasty approvals of leveraged ETFs tracking key South Korean tech stocks, especially Samsung Electronics Co. and SK Hynix Inc. The ETFs may have sold up to US$6 billion of these shares to maintain their ratios, demonstrating how some fund types are actually reinforcing and amplifying market movements.
On June 23, South Korea’s benchmark stock index fell almost 10% as investors sold out of these key assets, triggering a temporary trading halt. Almost concurrently, the iShares China Large-Cap ETF, regarded as a broad proxy for China, fell to a new 52-week low.
HSBC did point out that even in the calmest of markets, ETF construction can be a complex business, with issuers having to align products with strategy, and ensure accurate benchmark tracking. Simultaneously, they have to provide investors with ample liquidity as well as robust risk management, while maintaining regulatory compliance.
Asia’s markets have not historically been calm. And some suffer from overconcentration in leading stocks. In Korea, the market is dominated by SK Hynix and Samsung Electronics, while the Taiwanese market is dominated Taiwan Semiconductor Manufacturing, leaving them all exposed to broader market shifts around chip supply and artificial intelligence.
After war erupted in the Middle East, CNBC analysis warned global emerging-markets ETF investors of their overconcentration in Asia Pacific and in stocks tied to the AI boom. Those warnings appear to be coming home to roost.
ETFs probably make good servants but poor masters. Investors and regulators alike had better scrutinise them more carefully and critically, especially when they shift from following and accessing markets, to influencing them.
Investor choice and investor education regarding ETFs in Asia Pacific looks more essential than ever before.
