What’s next for the exchange-traded funds market? PwC explains

The market is ready for product development transformation.

As the popularity of exchange-traded funds (ETFs) accelerates, PwC Hong Kong said the ETF market is at an inflexion point and prepared to create a new wave of a shift in product development.

In a statement, PwC noted the rise of ETFs in the Asia Pacific, adding that the Asia Pacific ETF and their assets under management are projected to grow from  $7.8t (US$1t) to at least $15.6t (US$2t) by June 2026.

It also noted that Hong Kong, one of the leading ETF markets in the region, offers a diverse set of products and a deep pool of liquidity, attracting leading and renowned international issuers, market makers, and investors. 

Hong Kong is also well positioned to become a significant centre for the ETF market because it is a gateway to mainland China, a regional connector to the Asia Pacific region, and has attractive legal, tax, and regulatory settings, PwC said.

Further, PwC also highlighted that thematic ETFs in Hong Kong are expected to have significant traction driven by rising levels of financial literacy, growing investor awareness, and innovation from the broader asset management industry.

There were also policymakers in Hong Kong that supported the local ETF industry, which improved product diversity. 

For instance, the Securities and Futures Commission streamlined its regulations for ETFs. The framework gives international ETF providers an additional route to list an ETF in Hong Kong outside of the existing cross-listing scheme.

Meanwhile, PwC said Hong Kong’s ETF distribution network is centred on a commission-based model. With this, PwC said the distributors’ interests could not be aligned to investors and the ETF product suite could be overlooked because of lower cost structure.

It also said the fee-based advisory model, which is a norm for private banks and wealth managers, is seen as a significant source of demand for ETF flows in the US and Europe. Hong Kong has yet to adopt this model but it is projected to be a potential and effective distribution channel for ETF providers.

As new types of ETF products emerge in Hong Kong, PwC said it could push for greater investor education and awareness, which will also make changes in investor behaviour.

PwC said retail investors have been reliant on banks for advice but due to potential conflicts of interest stemming from commission-based models for fund distribution, it would be an opportunity for ETF providers and other key stakeholders to be open for direct investors education initiatives.

$1 = US$0.13