• ETFs in Singapore have been re-classified as retail products by the central bank
  • The re-classification has allowed an explosion in assets under management
  • S-REIT ETFs are particularly popular with Singaporean investors

Singapore has become one of the fastest growing ETF markets across Asia over the past few years driven by the reclassification of ETF products and the loosening on the regulator control on local savings plan’s investment in passive products, which have diverted more capital from individual investors and retail savings to local ETFs.

Singapore’s ETF market has been undergoing a phenomenal growth in recent years. The combined AUM of all locally listed ETFs increased from US$2.83 billion in March 2016 to US$3.48 billion in March 2019, equivalent to a compound annual growth of 23%. The number of monthly active ETF investors grew by 33% year-on-year in 2018, according to the Singapore Exchange (SGX).

There were 51 ETF listed in Singapore as of January 29. Although more alternative ETFs such as real estate investment trusts (REITs) ETFs came to the market over the past two years, the majority of capital are captured by plain vanilla products.

Figures from the SGX show that the equity and fixed income ETFs doubled their total AUM from US$780 million to US$1.52 billion over the past three years ended December 2018.

The market growth has outpaced many regional rivals. For example, ETFs - including leveraged and inverse ETPs - in Hong Kong only grew by 2.6% over the same period to about US$39.8 billion at the end of 2018.

According to Richard Siaw, vice president for Asia at US ETF manager VanEck, the growth of Singapore’s ETF market was primarily attributed to several factors such as the reclassification of ETFs from specific investment product (SIP) to excluded investment product (EIP), as well as growing public awareness of ETFs.

The Monetary Authority of Singapore amended the classification rules for passive funds in 2015. Under the new rules, some qualified ETFs are categorised as EIP, a simple structured fund products that are generally understood by retail investors, rather than SIP.

In comparison, retail investors generally find SIP such as derivatives less accessible as the structure of the product is more complicated.

The relaxation on the investment of regular share savings (RSS) plan, a monthly investment plan for local investors, in ETFs is another impetus.

The reclassification of ETFs improves the ETF access for retail and DIY investors, and the increasing number of robo-advisory platforms allows RSS plan investors to access ETFs more easily, says Mr. Siaw, adding that investors are more eager to invest in income-focused products such as

REIT ETFs.

Alternative ETFs

According to Keri Neo, head of product of the SGX, recent new issuance of ETFs on the SGX have been income focused in the REITs, fixed income and dividend space.

“ETFs listed on the SGX over the past two years have been successful with sizable AUM raised, averaging S$160 million as of end of February 2019,” she says.

REITs ETFs has become one of the most popular non-conventional ETFs in Singapore. There were three REITs ETFs being launched in Singapore over the past two years. REIFs ETFs had a year-on-year AUM growth of 20% in 2018, bringing the total AUM to around S$302 million.

The growth of REITs ETFs is partly boosted by favourable tax policy.

The local government announced in its 2018 Budget to extend tax transparency treatment for S-REITs to ETF invested in REITs.

With the tax transparency treatment, distributions from S-REITs to ETFs will no longer be subjected to a 17% withholding tax for individuals for both locals and foreigners.

Nikko Asset Management, which entered Singapore’s asset management industry by acquiring stake in DBS Asset Management from Affin Huang IM in 2011, has launched four ETFs.

According to Phillip Yeo, joint global head of ETF Business at Nikko Asset Management, the company launched the NikkoAM-Straits Trading ex-Japan REIT ETF in 2017, which is the first ex-Japan REIT ETF in Singapore.

The REITs ETF is “quite a success story for us in terms of product innovation”. It has been very well-received in the market, tripling its size since its inception, Mr. Yeo says.

The overall ETF market in Singapore has been gathering growth momentum over the past few years in terms of participation activities and fund flows. The company’s ETFs AUM has grown by 30% since 2015, he adds.

He believes the scope of ETF product will continue to diversify with more exotic products such as L&I ETFs going forward.

According to Ms Neo, more investors in Asia Pacific are looking to capture the opportunities from MSCI’s decision to quadruple the weighing of Chinese shares in its global benchmark.

“We expect to see some flow in these tactical shifts in Singapore, as well as growing traction in the existing ETFs such as REIT ETFs which have reached sizable AUM of above US$100 million for institutions to include in their portfolios,” she says.