More than half of the 100 participants in the survey who invest in exchange-traded funds (ETFs), indicated that they will increase their investment in these products within the next 12 months.
The survey targeted professional investors in the region, including independent financial advisors, institutional investors, discretionary fund managers and investors affiliated with retail and private banks.
Although only 43% of mainland Chinese investors said they have plans to increase their ETF holdings, there is still great potential for growth given the size of the country’s investor population, the study said.
However, overall usage of ETFs is moderate when compared to the US and Europe, the study noted. Only 2% of Greater China investors surveyed have at least 51% of their AUM in ETFs, which compares with 7% in Europe and 33% in the US.
In addition, most of Greater China investors hold relatively few ETFs. Around 84% of respondents have fewer than 10 ETFs in an average client portfolio, which means that most ETF investments in Greater China are concentrated in a handful of products. This trend is especially pronounced in Taiwan, where 75% of respondents have fewer than five ETFs in an average client account.
Product trends
Fixed income ETFs are especially popular among Greater China investors. Nearly 80% of the respondents invest in fixed income ETF products despite the greater range of equity products available in the market.
“Greater China investors prefer ETFs that provide access to less liquid assets that typically trade infrequently and over the counter, such as high-yield corporate bonds,” the study explained. “The popularity of fixed income products might also reflect cross-border investment trends, especially in Hong Kong.”
However, investors in each of Greater China’s three markets would like to see more ETF products across different asset classes, according to the survey. In particular, 65% of Hong Kong investors would like to see more global fixed income ETFs and 63% of them want to see more currency-hedged products, as there are only two such ETFs listed in Hong Kong.
Smart beta products also have room to grow in Greater China, especially in Hong Kong and Taiwan. Around 60% of respondents in both markets plan to increase their use of smart beta ETFs over the next 12 months. On the flip-side, only 38% of mainland investors plan to increase investments in such products.
At the moment, one-third of Hong Kong investors have at least 10% of their AUM invested in smart beta ETFs, which compares to 16% in mainland China and 15% in Taiwan.
ETF Connect prospects
Within the Greater China market, more Hong Kong investors trade outside Asia. Around 45% of the respondents indicated that they buy ETFs outside the region, which compares to only 10% of mainland and 15% Taiwanese investors.
However, BBH expect these numbers to shift with the likely introduction of the ETF Connect programme, which may increase mainland investors’ exposure to Hong Kong, and eventually to other markets.
The prospects are good for southbound ETF Connect trading: 88% of mainland investors said they are likely to invest in Hong Kong ETFs if they are included in the Stock Connect programme. The programme, which allows international and mainland China investors to trade in each other’s markets, has attracted more northbound than southbound trading. In the first year of operation, Shenzhen Connect, for example, had $61bn in southbound turnover, compared to $139bn northbound.
If the ETF Connect launches, a majority of respondents from the mainland said they would be interested in Asia-Pacific and Hong Kong equity-focused products, followed by fixed income ETFs.
