Joseph Ho of Credit Suisse looks at the next wave of product innovation for ETFs, including non-equity and actively-managed products.

Date: Nov 2011

Tags: ETFs, Active management, Fixed income

• In the US, the next wave of product innovation is going to come from actively-managed products – the holy grail for the ETF market
• However, from an active manager’s point of view, they don’t want to disclose their holdings, which presents a hurdle for adapting this to the ETF world
• Today in Asia, the stricter regulatory standards mean it’s no longer straightforward for a fund which is UCITS-compliant to get cross-listed
• When it comes to the potential for non-equity ETFs to develop in Asia, the fragmentation and the lack of economies of scale in the region mean issuers are reluctant to launch a large range of products

In the US, the next wave of product innovation is going to come from actively-managed products, said Joseph Ho in an interview.

The market is beginning to see some of the larger issuers showing interest in this space, he said, and with 1,200 products already in the US, covering so many asset classes, the next place to look is at which benchmarks are available.

The tendency is to use more customised benchmarks, or to use benchmarks with a strategy, explained Ho.

In line with this, the market has seen examples where fundamental benchmarks have been used which are longer just the traditional cap-weighted versions.

But the holy grail for the ETF market would be transforming the actively-managed mutual fund into an ETF format, said Ho.

Hurdles to actively-managed ETFs

From an active manager’s point of view, Ho said they don’t want to disclose their holdings, which presents a hurdle for adapting this to the ETF world.

It this conflict can be resolved, it would lead to a big transformation of a different distribution platform, he said, from the traditional mutual fund sold via distributors to one where investors can directly invest into the funds.

Cross-listings

According to Ho, most of the cross-listings with ETFs happen in Europe because of the UCITS regulation which allows products to be passported in the different European markets.

Today in Asia, the stricter regulatory standards adopted across the region have meant that the authorities are now looking at the products themselves, he said. This means it’s no longer straightforward for a fund which is UCITS-compliant to get cross-listed.

Non-equity ETFs

When it comes to the potential for non-equity ETFs to develop in Asia, Ho said the demand for such products continues – for example gold and other commodities.

The issue, however, is that because of the fragmentation and the lack of economies of scale, issuers are reluctant to launch a large range of products or to support a large range of products, he explained. As a result, they focus on products they think they can sell.

An issue for the industry, therefore, is that if investors cannot find these products in a particular market, then they will just look overseas, where there are a plenty of them to choose from, said Ho.

When it comes to fixed income ETFs, in particular, he said there are now various issuers with a wide range of fixed income ETFs available in local markets.

Large institutions use them quite a lot, but retail investors are often constrained by their ability to trade locally.