Investors are increasingly using exchange-traded funds as building blocks for tactical asset allocation to generate stable income and to hedge against downside risk. It’s a trend that is driving growth of sophisticated ETFs such as active, thematic and covered-call funds.
Active ETFs have been particularly prominent in Asia Pacific, transforming the region’s investment landscape, according to Rory Caines, ETF specialist at J.P. Morgan Asset Management.
Figures from his firm show that active ETFs in the region grew at a 54% compound annual rate over the past decade, outpacing a 40% growth in the broader ETF industry.
Caines says investors like active ETFs because they combine efficiency of traditional funds with the expertise of active management.
Active ETFs have long been available in South Korea and Australia. The two countries now account for 31% and 16%, respectively, of active ETF assets in Asia Pacific. More recently, these funds have been available in Japan and Taiwan.
Institutional adoption
Dennis Fok, chief investment officer for ETFs at the Hong Kong unit of Korea’s Mirae Asset Global Investments, predicts that institutional ETF adoption will continue into 2026 because traditional active investments have largely underperformed broad market benchmarks.
“High transparency, relatively low transaction costs and unique ETF liquidity ecosystem are among the reasons why institutional investors are turning to ETFs,” he explains.
It’s a trend exemplified in Hong Kong, which has a well-developed ETF liquidity ecosystem. Institutional investors can seek competitive, real-time quotations from multiple market makers for large ETF trades covering different asset classes.
“This process helps investors reduce trading costs, which is especially important for fee-sensitive asset allocators,” Fok says.
Trends
There are three mega trends shaping the ETF universe generally, according to Xinyuan Zhang, index research director at Chinese asset manager E Fund Management.
The first is frontier technology innovation, highlighted by foreign demand for Hong Kong-listed ETFs that track Chinese companies specialising in robotics, artificial intelligence and biotechnology.
The second trend is diversification as investors look to gold and digital asset ETFs to diversify beyond traditional asset classes and hedge against market volatility.
The third trend is financial democratisation, with asset managers developing uniquely structured ETFs that incorporate derivatives, making sophisticated investment strategies accessible to more investors.
ETFs in China
Last year, China surpassed Japan to become the largest ETF market in Asia Pacific, with over 6 trillion RMB (US$864.5 billion) of ETF assets. But Zhang observes that ETF innovation in the country is relatively underdeveloped.
“Most Chinese ETFs track straightforward vanilla assets and are not allowed to incorporate derivatives such as options and futures,” she says. “On a positive note, some innovative ETFs, such as smart beta and high-dividend strategies, have begun to attract the interest of Chinese investors.”
Fok notes that broad-based ETFs with Chinese equity exposure delivered some of the best returns in global equity markets last year. He expects Chinese high-dividend equity ETFs to continue to attract investor interest in 2026.
“Investors are adopting barbell strategies,” he says. “They are investing in broad-based market ETFs to capitalise on China’s improving economy while also allocating to ETFs that provide a steady stream of income.”
He also observes that covered-called ETFs are gaining popularity worldwide, especially in Hong Kong. These funds invest in a portfolio of stocks replicating equity benchmarks while writing call options on the indices to generate option premiums.
“Investors look for alternative income sources rather than traditional dividends from stock investments,” Fok says. “Over the past ten years, the average annualised option premiums for the Hang Seng China Enterprise Index have been around 28%, making them an attractive proposition for investors.”
Outlook
Caines expects smarter portfolio construction and growing appetite for income to drive ETF growth in Asia Pacific. He notes that institutional investors are shifting their core holdings from traditional passive funds to research enhanced index ETFs, which combine index exposure with active strategies to capture alpha without taking on excessive risk by leveraging proprietary research and insights.
According to Caines, passive benchmarks are increasingly seen as inadequate in bond ETFs, with active strategies consistently outperforming. “Leading fixed income strategies, once accessible only to institutions, are now available to all through ETFs. This democratisation is transforming the region,” he says.
Zhang identifies the ETF Connect as a key growth driver for Hong Kong ETFs. The scheme allows investors in Hong Kong and China to invest in ETFs listed in each other’s markets.
“The Connect provides international investors with access through Chinese ETFs focused on sectors such as rare earths and biotechnology, areas that are not currently available through international managers,” she says.
She points out that Hong Kong-listed ETFs distributed in China through the Connect, known as southbound ETFs, enable investors in the Mainland to invest abroad since only 3% of Chinese ETFs are designed to track foreign markets.
