Exchange traded funds in Asia.

Abstract

The exchange-traded fund is a relative new comer to the financial markets and, in a relative short time, has acquired significant amounts of assets. The popularity of the ETF, fast as it has risen, has been evident mainly in the mature markets of the United States and Western Europe. In other markets, particularly in Asia, ETFs suffer from low asset values and even less recognition from investors. In this report, we conducted a systematic study of ETFs in general and covered topics such as the structure of ETFs, the advantages and disadvantages it offers to investors and the competition it faces from mutual funds and index funds. We also looked at the economics that drive the supply of ETFs to provide a more comprehensive look at the ETF industry at large. This report thus reveals that obstacles to the rise of ETFs in Asia include lack of awareness of ETFs due to the absence of incentives for suppliers of ETFs to push or create ETFs. It is also possible that Asia is generally still an emerging market where investors are not ready for passively managed funds since the inefficiencies of such a market enable actively managed funds to generate abnormal returns. The low profitability of ETFs due to regulations on short selling in emerging markets also limit the availability of ETFs in Asia. We believe our findings will shed light on this issue and provide new avenues for further research.