AI and ESG via ETF
The Greater China area accounted for almost three-quarters of net inflows into Asia Pacific exchange-traded funds last year as investors sought passive funds to navigate a turbulent market, says Chris Pigott, head of Asia exchange-traded fund services at US financial services firm Brown Brothers Harriman (BBH).
Thematic ETFs in particular are becoming popular as investors use them to access vibrant sectors such as artificial intelligence, and environmental, social and governance.
Net inflows into Greater China ETFs increased from US$57 million in 2021 to $91 billion last year, representing 72.2% of the Asia Pacific total, which itself was 15% of the global figure, according to figures compiled by BBH.
“An increasing number of investors use ETFs in portfolio construction,” Pigott says in an interview with Asia Asset Management. They view ETFs as a versatile tool for investing through different market cycles and consider the structural benefits, such as transparency and low management fees, as important factors for increasing returns.
BBH polled more than 100 institutional investors and fund managers in Greater China this June and found that 75% expect to raise their ETF investments this year.
The survey findings indicate that market volatility and US interest rate hikes were key reasons why investors allocated more to ETFs last year. Around 77% of those in Greater China shifted from mutual fund strategies to smart beta ETFs as they sought income features and strategies to mitigate volatility. “The change aligned with the overarching trend globally,” Pigott says.
The survey also showed that half the respondents moved away from index and active mutual funds and into active ETFs.
Tapping into global trends
More than 90% of investors polled plan to increase or maintain their exposure to thematic ETFs. According to Pigott, internet and technology, robotics and artificial intelligence and ESG are the most in-demand thematic strategies.
“In the Hong Kong market, three out of the top four ETFs in terms of year-to-date net new flows through May are thematic technology focused ETFs,” he says. “Thematic ETFs have gathered attention driven by the investment opportunity they provide to access global trends that are propelling future economic growth.”
“This segment has been an area of product development focus over the past few years and investors have been increasing allocations to the point that thematic products are some of the largest ETFs in the region by asset size,” he adds.
He observes signs of further product diversification in the fact that exchanges and regulators in the Greater China area are supportive of new strategies and investments, underscored by the listings of the first crypto ETFs in Hong Kong late last year. The two ETFs tracking bitcoin and ether futures listed on the Chicago Mercantile Exchange were launched in December 2022 by Hong Kong-based CSOP Asset Management.
“Hong Kong has been a leader in Asia in broadening the product line-up through active, thematic, fixed income and crypto ETFs,” Pigott says.
Demand is also rising in China for Hong Kong-listed ETFs. Some 69% of investors in China bought Hong Kong-listed risk management ETFs last year while 43% opted for ESG or thematic strategies. The investments were primarily done through the ETF Connect link between Hong Kong and China.