Nascent growth appears for active ETFS

Investors start to realise their value in portfolios

SINGAPORE: More active exchange-traded funds (ETFS) are in the pipeline for the Singapore Exchange (SGX) in the wake of increased investor demand.

Kang Wei Chin, the exchange’s associate director of securities trading, said “discussions are under way with local and global ETF issuers” to launch more active ETFS here.

The most common ETFS here are passive, that is they follow an underlying index or sector and will at most replicate the performance of the index or sector.

Active ones, on the other hand, are managed by an investment manager who makes decisions on what the fund will invest in, with the aim of beating the market.

Active ETFS can also be likened to unit trusts, but unlike such trusts they are traded on an exchange, so investors can buy and sell units much like the way they would trade shares.

Active ETFS made their debut here with the listing of the Lion-nomura Japan Active ETF on Jan 31.

Kang said this ETF has averaged more than S$500,000 in daily traded value since its launch, adding that investors are buying more than they are selling.

Online investment platform FSMONE. com has also seen “growing trading volumes” in the ETF.

General manager Joshua Chim said investors are buying into the Japan story, with its equity markets having hit record highs in recent sessions after more than three decades of sluggish performance.

Richard Siaw, director of South-east Asia at Global X ETFS, said the trend towards active ETFS started about five years ago in the United States.

There are around Us$600bil in assets under management in active ETFS out of the US$8 trillion in all ETFS (passive and active) in the United States, he added.

While actives represent a mere 7.5% of total ETF investment, Siaw noted that there is growth potential, with around 25% of new money going into these in 2023.

Kang said the Monetary Authority of Singapore’s Grant for Equity Market Singapore scheme was expanded in January 2024.

The scheme aims to support companies that want to list here by defraying their listing costs and to encourage analysts to write more research reports on local equity markets.

Its expansion means ETF issuers can now leverage the listing grant to launch more products, added Kang.

They can also tap the research talent development grant to provide more research coverage on active ETFS.

The interest in active ETFS comes as passive ETFS are hitting their stride here, a process that began over the past three years, with the proliferation of robo-advisers and online and digital mobile trading.

Kang noted that two passive ETFS – from State Street Global and Nikko Asset Management – tracking the Straits Times Index hit their first billion in 2019, more than a decade after their market debuts.

Subsequently, they took just 17 months to hit the second billion.

Chim said: “Passive ETFS will continue to be popular among investors because they have lower management fees and longer track records.”

He also noted that investors can use both active and passive ETFS in their portfolios – use passive ones for the broad market exposure while setting aside a small amount for active ones that they believe can generate higher returns than the benchmark.

Daryl Liew, head of portfolio management at Singalliance, said he would use a passive ETF in developed markets like the United States, where he knows he cannot get an edge in delivering excess returns.

Then he would opt for activities for ideas that he likes. He believes, for instance, that the Magnificent Seven tech stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – are overvalued, so he will invest into an active ETF that underweights these stocks or into one that uses valuation metrics to sieve out overvalued shares.

He added: “Passive product, lower fees versus an active product with higher fees. If you are paying higher fees then you need to be generating some (excess returns), otherwise you might as well take the lower cost option.”

The full suite of ETFS on the SGX tracks equities, bonds, real estate investment trusts (REITS) and even commodities, such as gold.

Kang said investors can use these ETFS to build a diversified portfolio: “If they want to allocate to REITS, to regional equities, to bonds, they can do it on their own. They do not need to call their financial adviser to do it for them.”

Siaw noted that investors can also use active ETFS to effect change, such as those guided by the environmental, social and governance (ESG) principle.

An active ETF manager could exclude controversial companies that flout ESG rules, and therefore “be a steward of good ESG”, he added.

“The trend towards active ETFS started about five years ago in the United States.” Richard Siaw