Passive investments set to overtake actives by 2024, says Moody's

By Francis Nikolai Acosta

Added 6th February 2017

Assets held in passive investments will represent more than 50% of the US market in four to seven years' time, with the growth rate in Asia expected to increase, according to a Moody's report.

Passive investments set to overtake actives by 2024, says Moody's

"Investor adoption of passive and low-cost investment products will continue irrespective of market environments, and we estimate that passive investments will overtake active market share between 2021 and 2024," the report said, citing data-based findings. 

"Asset managers that have core competencies in ETFs and other passive strategies will benefit from this growth."

Moody's singled out Vanguard, Blackrock, State Street, Dimensional Fund Advisors and Invesco as potential winners.

In the US, exchange-traded funds (ETFs) and index trackers currently represent 28.5% of the market, the ratnigs firm estimates. Passive product adoption in Asia-Pacific and Europe is lower, with assets at between 5-15% of the total market.

ETF adoption in Asia-Pacific is low because sales practices may not favour the best interests of investors (the commission-based wealth managment model is dominant in Asia). In addition, markets are overall less developed than in the US and there may be less investor awareness of passive products.

However, the credit ratings agency believes that the potential for the ETF asset growth rate in both regions is greater than in the US. 

“Over time, we expect passive adoption in the EU and Asia to follow a pattern similar to the US, provided that global transparency and communication improves and that global markets continue to mature and become more investor-friendly,” Moody’s said in the report.

Asia momentum

There have been signs that ETFs are becoming more popular in Asia-Pacific.

In 2016, Asia-Pacific ex-Japan ETF/ETP assets reached a record high of $135bn, according to ETFGI, as reported. However, the region’s share only accounts for 4% of the industry’s global assets of $3.5trn. 

In Hong Kong, locally domiciled ETFs, which does not include cross-listing ETFs, saw net inflows of $580m in 2016, which is a reversal from the net outflow of $1.8bn in 2015, according to Morningstar data, as reported.

In Japan, ETF assets increased to around $170bn in 2016 from $134bn in 2015, according to ETFGI data.

Emerging Asia lags 

However, the development of the ETF industry is limited to the more developed markets in Asia-Pacific. There are significantly more ETFs made available for sale in developed markets when compared to the emerging Asia counterparts. 

Hong Kong, for example, has 175 ETFs, according to the stock exchange, while Japan has around 150 listed ETFs in the market, according to ETFGI data. 

Other developed markets also have at least more than 60 ETFs, such as Taiwan (66 ETFs) and Singapore (77 ETFs), according to their bourses.  

On the flipside, the number of ETFs made available in emerging Asian markets, particularly in Southeast Asia, remains low.

In Thailand, only 15 ETFs are available after nearly 10 years of the first ETF launch, according to the Stock Exchange of Thailand

Indonesia's first ETF was launched in 2007, but only 10 products are listed on its exchange

In the Philippines, the first and only ETF launched in December 2013.

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