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Is Asia falling out of love with ETFs?

Is Asia falling out of love with ETFs?

Deutsche Bank Asset Management closed 16 of its Hong Kong-listed ETFs on July 13, the latest firm to shutter Asia-focused passive products in the face of weak demand.

According to Hong Kong Exchanges and Clearing data, there were 26 ETF delistings in Hong Kong in 2016, following a global trend of 276 ETF closures, with a total of 623 listings removed from 28 exchanges.

‘Demand for exchange-traded funds in Asia is lesser than in Europe and the US,’ Tuan Huynh, CIO and head of discretionary portfolio management, Asia-Pacific at Deutsche Bank Wealth Management told Citywire Asia.

While the German private bank’s discretionary portfolios have a greater exposure to ETFs, the penetration of discretionary portfolio management for Deutsche Bank WM in Asia is very low, accounting for less than 10% of mandates, in line with peers.

‘On the advisory side, most of our clients either invest directly into single lines because of our own recommendations and their own knowledge or into mutual funds,’ Huynh said.

The low demand for ETFs in Asia is because of the region’s underdeveloped markets, which offer ample opportunities for active managers to tap market discrepancies and inefficiencies, according to Huynh. Deutsche Bank Asset Management now has 17 ETFs listed in Hong Kong.

Although passive investing is now firmly in the mainstream of investing in the US, many investors are unconvinced about its merits in Asian markets, and in particular, in emerging markets.

‘We think passive doesn’t work in EM. Markets here are not efficient, not as efficient as in the US anyway. And the indices still have a lot of biases,' Jeik Sohn, investment director, Asia at M&G Investments told Citywire Asia.

There are also technical reasons why some firms are closing their passive funds.

Blackrock delisted its iShares CSI A-share Financials Index ETF, a synthetic fund that gave investors exposure to financial stocks listed on China’s domestic stock exchanges, in February. A spokesperson for the firm said that the ETF was launched in 2010, at a time when it was virtually impossible to get physical exposure to the A-shares market. Synthetic ETFs have fallen out of favour with investors.

The firm has since obtained an RQFII -- Renminbi Qualified Foreign Institutional Investor -- certification, allowing it to access the market directly and build physical ETFs.

‘What we changed is that we had some legacy funds that were launched in 2010. They were all China A-share funds and in 2010 there wasn’t a capability to have physical exposure. They were all synthetic because we didn’t have RQFII,’ the spokesperson said.

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