Vanguard plans to penetrate Asia, but uptake of its ETFs remains low thanks to a fragmented market
Asian investors prefer buying Asian ETFs domiciled in other countries, as they are cheaper and more liquid.
Vanguard will deepen its penetration of the Asian ETF market after experiencing 207% growth of its Asian ETF business over the past three years. The world's second largest asset manager is looking to tap into the growing asset allocation demand from local institutional investors.
Vanguard made its foray into Asia in 2013 with the launch of the Vanguard FTSE Asia ex-Japan Index ETF in Hong Kong. It has rolled out more ETFs since and now has a diversified product offering ranging from Asia and US-focused to China-focused.
Vanguard launched its sixth ETF, Total China Index ETF, in the Hong Kong Stock Exchange in May. The product is the company's first A-shares ETF that tracks A-shares available under the Stock Connect - a cross-border programme that allows international investors in Hong Kong and Mainland investors to access each other stock markets.
The expansion of product line-up boosted Vanguard's Asia ex-Australia ETF assets by 207% from September 2015 to August 2018 although the company does not disclose the figure for the AUM.
Despite the staggering growth, it can be "very tough" to build the ETF scale locally in Asia because of its "fragmented" market structure and captive distribution landscape, according to Axel Lomholt, head of ETFs, International, at Vanguard.
Vanguard has made its mark on low-cost ETF strategy, but it is difficult for locally domiciled ETFs to significantly reduce their total expense in order to compete with US ETFs especially in Asian institutional space.
For example, the average management fee for US equity ETFs available in Asia is five times those charged by their counterparts in the US, Mr Lomholt points out.
A major factor is because the US market has a "perfect ecosystem" for ETFs with better market liquidity and infrastructure, he explains.
Asian institutional investors are "completely agnostic" of where they buy the ETF from. In this context, US ETFs look "more attractive" to them compared with locally domiciled ETFs because of their low management fees and better volume, he adds.
Looking forward, Vanguard considers Asia as a very important market with its growth potential although its ETF adoption rate remains very low.
Data from London-based investment research firm ETFGI show that global ETFs assets grew at a compound annual growth rate of 23.4% over the past 15 years to almost US$5 trillion at the end of August.
In addition, ETFs and index mutual funds accounted for 25% of the global mutual fund market as of June 2018, up from 10% in 2007, but only 1.7% of the aggregated $30 trillion of investable assets in Asia Pacific have been allocated to ETFs.
"If you look at ETF adoption [in Asia] as a percentage of total investable assets, it's pretty low across the region," Mr Lomholt notes.
However, the overall investable assets are high in Asia, so the growth will be "very significant" even if the adoption rate increases by only one percent, he notes.
More importantly, Asian institutional investors are still keen on locally domiciled ETFs with Asian exposure such as Asian fixed income.
Currently, Vanguard's client base is a balanced mix between institutional and retail investors in Asia, but Mr Lomholt expects the shares of institutional clients will increase going forward.
Vanguard will press ahead with its expansion in Asian ETF market at which it will strengthen the connection with local institutional investors such as providing ETF education. Hong Kong, South Korea, Japan and Singapore will be the major growth drivers in the region, Mr Lomholt notes.
Vanguard had approximately $5.1 trillion in total assets under management globally as of January 2018.
Photo: Axel Lomholt