Launching the first US-listed ETF in 1993, State Street Global Advisors, also this year’s winner of the House Award in the Physical ETF category, bestowed a key building block of portfolio construction unto the investment world. After twenty-five years, ETFs have taken on many new shapes, but their core objective remains the same: to provide investors with a simple, transparent, and cost-effective way to invest. At this important juncture, Ray Chan, Head of SPDR ETFs, Hong Kong, looked at the past and future of ETFs and shared investment tips with investors.
BENCHMARK (BM): Congratulations on the well-deserved win. On the 25th anniversary of ETF, in what ways do you think this product has innovated the investment arena?
Ray Chan (RC): Thank you, we’re glad to celebrate the quarter-century anniversary of ETFs with this meaningful win. Ever since we launched the first US-listed ETF, the ETF industry has been growing, boasting a size of 6,700 ETFs globally with US$4.7 trillion in assets as of November 30, 2017. Looking back at the evolution of ETFs, we believe a lot of innovations are investor driven – for example, insurance companies using ETFs to invest for their general accounts because of ETFs’ inherent liquidity advantages over individual bonds, financial advisors using ETFs for asset allocation and diversification planning, or a number of wealth management firms using ETFs to package their investment beliefs into outcome-oriented products for their clients.
ETFs even help mutual funds innovate. Before ETFs, a US$100 million inflow into a mutual fund would mean the portfolio manager had no choice but to either leave it in cash or sweep it into a money market fund. Now that money can be put to work in an ETF that achieves similar exposure and is aligned with the fund’s objective.
BM: The development of ETFs has certainly gone a long way. What is your view on how the ETF market will evolve going forward?
RC: Looking ahead, as investors’ needs evolve, we expect to see more innovative ETF applications. For example, ETFs now allow investors to target specific opportunities or to slice deeper into asset classes. In 2016, we successfully launched an ETF in the US that seeks to invest in the US companies with the highest levels, within their sectors, of gender diversity on their boards of directors and in their senior leadership. This ETF not only allows investors to capture potential returns from gender diverse companies but also to use their capital to encourage social change.
Regarding geography, we believe there’s tremendous room for growth in Asia, as penetration is still relatively low compared to the US. For example, there are more middle-class Chinese citizens than there are American citizens in total. ETFs are just scratching the surface in these markets. New initiatives, such as the ETF Connect, will help encourage ETF investing, while Robo advisors can be potential partners for wider ETF distribution. Given ETFs’ versatility, we believe there are plenty of new applications and innovations still to come in Asia.
BM: Although ETFs are growing in Asia, they are still relatively new to many retail investors. Can you advise them on how they can use ETFs in their portfolios? What factors should they look at?
RC: Surely. ETFs are highly flexible investment vehicles that can play a variety of roles in any investor’s portfolio. They can be used to build a low-cost, diversified core holding to complement an investor’s single-stock holdings, active funds, or other investments. This is also called a “core-satellite strategy.” Investors can also use ETFs for tactical asset allocation or to pursue sectors or asset classes that they believe will increase portfolio returns.
Like with any other investment, investors should always look under the hood. Not all ETFs are created equal. Aside from fees, investors should also consider the index and the indexing methodology, as well as the liquidity and track record, of the ETF.
BM: Lastly, ETFs are increasingly being used in constructing MPF funds. In your opinion, how will this trend unfold?
RC: We believe that the increasing inclusion of ETFs, such as the Tracker Fund of Hong Kong, in MPF portfolios is a positive development. This inclusion has allowed Hong Kong investors to benefit from low-cost investing with potential long term benefits for their portfolios. When it comes to retirement, every basis point of return counts, so we expect ETF adoption in the MPF space will continue to grow. Furthermore, we have been working with and will continue to partner with MPF providers to understand and address the long-term needs of their members. BM