Exchange Traded Funds (ETF) have seen huge growth in trading volumes in recent years. They are now an integral part of the financial sector, with the Far East a particularly buoyant market for this relatively new type of investment vehicle. There are several reasons why ETFs are proving popular and why trading volumes are expected to increase significantly in the coming years.

 

What is in an ETF?

 

ETFs provide similar exposure to mutual funds, but there is one big difference: they are tradable on stock exchanges instead of the once-a-day pricing of many mutual funds. This means it is now possible to trade ETFs as you would an ordinary share, but there is much more to this new type of investment.

 

Tremendous growth in the Far East

 

The Asia-Pacific region now has an ETF market valued at more than $1 trillion from a relatively low base just five years ago. There are many practical reasons why this market has expanded dramatically, such as eligibility for Korean pensions and Japan's Nippon individual savings accounts. This has created a firm base from which the ETF market can grow, now a preference for many investors over their mutual fund counterparts.

 

Regulatory assistance

 

As we have mentioned numerous times, the APAC region has traditionally been pro-investor and pro-business regarding regulations. This has been a prominent factor in the growth of the ETF market, with Hong Kong and Singapore, again, leading the way. Tweaking settlement procedures, tick sizes, and a positive approach to institutional and private investors have created significant liquidity, the key to any thriving market.

 

The benefits of ETFs

 

There are several benefits to investing in ETFs over their traditional mutual fund counterparts, which have fed the ongoing growth in volumes. These include:-

 

Trading flexibility

 

As mentioned above, while ETFs provide a similar exposure to mutual funds, they are tradable during regular market hours. This makes it much easier to manage your portfolio, especially during volatile markets, with enhanced transparency. In effect, a mutual fund hybrid, this has attracted substantial trading volumes, which provide a degree of liquidity few sectors can offer. This is a major positive to those looking at active management of their investments.

 

Portfolio diversification

 

The ease with which ETFs can be created, focusing on a particular asset type or providing diversification, has enhanced options for private investors and fund managers. For example, some ETFs focus on cryptocurrencies, green technology and the up-and-coming ESG sector. Then, we have the more traditional ETFs focused on particular indices.

 

Lower cost

 

The cost of creating and managing ETFs compares favourably to their mutual fund counterparts. As they are traded similarly to shares, there are no redemption fees, providing an immediate boost to investors compared to mutual fund costs. The structure of ETFs means many of the additional administration expenses associated with mutual funds, such as client services, can be reduced or eliminated.

 

Summary

 

Investment in ETFs is a global phenomenon, not just focused on the Far East, but this is an area of the world which has seen massive growth. Akin to a magnet, deep-established liquidity attracts interest from those issuing ETFs in regions such as Europe, with many creating cross-listings on their respective exchanges. At the heart of the growth is a proactive and flexible approach to regulations, something in which the Far East has excelled for many years.

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