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Apr 16, 2019

US and European ETF investors looking to China

Sixty-nine percent of US and 71 percent of European respondents plan to invest in Chinese capital markets

The vast majority of US and European ETF investors plan to invest in China in 2019, according to a survey from New York-based private bank Brown Brothers Harriman (BBH).

According to the survey – Shining Through: ETF Opportunities in Greater China – 69 percent of US and 71 percent of European respondents have plans to invest in China’s capital markets this year with a relatively even split between leveraging ETFs and making direct investments through existing inbound investment channels.

For US and European investors, historical performance is cited as the most important selection criterion, highlighting an interest in products that can mitigate risk or generate outsized returns. 

This is aligned with China’s ongoing index inclusion process, which began in 2018 when MSCI started to include Chinese A-shares in its flagship Emerging Markets benchmarks. 

In February MSCI announced the next stage in A-shares index inclusion. The existing inclusion factor of 5 percent for the Emerging Markets Index will be increased to 20 percent in a three-step process that will be completed by November 2019. The A-shares weight in the pro forma Emerging Markets Index will increase to 3.3 percent after the completion of the three steps. Expectations are therefore close to $70 bn for inflows into Chinese A-shares in 2019 – with index inclusion being a driving factor, notes BBH.

Greater China represents just 2.1 percent of the $5.1 tn global ETF market; the US represents more than 70 percent, with nearly $3.6 tn, while the European market reached $793 bn in 2018. 

In addition, the survey highlights that mainland China investors show strong interest in accessing Hong Kong ETFs, with 98 percent of mainland respondents interested in buying them either through the Stock Connect or Mutual Recognition of Funds program.

Moreover, cost is not a key driver in ETF selection across Greater China – somewhat defying global industry assumptions that cost is everything, with expense ratio near the bottom of the list of ETF selection criteria in mainland China and Taiwan.

‘These findings highlight the unique investor preferences and differing stages of ETF use across Greater China. ETFs are becoming an increasingly important component of institutional investors’ portfolios across the region,’ says Chris Pigott, senior vice president of BBH Hong Kong. ‘Looking forward, regulatory development and enhanced ETF market infrastructure are areas of focus that will provide the foundation to support the expected growth.’

The Greater China findings are a subset of a larger global ETF investor survey that measured the expectations and preferences of 300 institutional investors, financial advisers and fund managers from the US, Europe and Greater China.