The rapid growth of passive strategies, i.e. index-based investing, has been extraordinary.
In 2023, passive fund assets globally surpassed active fund assets, driven by the proliferation of exchange-traded funds (ETFs), whose diversification, ease of access and cost efficiency appealed to both the growing retail investor base and institutional investors.
ETFs have democratised access to broad markets, much like stocks. Initially marketed to retail investors for their low fees, ETFs are now being embraced by institutions managing large, diversified portfolios.
While the shift started in equity markets, it has spread to other asset classes, with fixed income ETFs becoming increasingly popular.
The increasing availability of bond index data over the past decade has boosted this trend. Its sufficient track record, given the first bond ETF was launched in 2002, has also made investors more comfortable using an index-based approach in bonds.
The result is the transformation of investment opportunities across markets and asset classes, as growing availability and liquidity of index-based products make them an integral part of the overall financial market structure.
“If you look at the liquidity of ETFs listed in the U.S., many of them have the highest turnover among all listed securities,” says Sue Lee, Asia Pacific Head of Index Investment Strategy at S&P Dow Jones Indices (S&P DJI). “That shows that these passive products are not just a buy and hold vehicle, but individual investors, hedge funds and institutional investors are increasingly using them to access and trade, taking advantage of the ample liquidity around indices.”
Global Phenomenon
The U.S. has long been the largest and most liquid market for index-based investing, but passive strategies are also proving popular in Asia.
Take Taiwan as an example. Given investors’ preference for income, the ETF market initially developed on fixed income but has expanded to income-driven equity strategies in recent years. Multi-asset ETFs are expected to be launched next year, making the investment choices even more diverse.
South Korea, meanwhile, is among the more innovative markets, witnessing a recent spurt in options-based strategies. This year, an ETF was launched based on a systematic call-overwriting strategy using zero-day to expiration (0DTE) options, which are contracts that expire on the same day they trade, pushing the market to new heights.
Lee says the 10-year compound annual growth rate of the global ETF market, by assets under management, is about 18%—with Asia Pacific mirroring that—according to Bloomberg data. Taiwan has seen stellar growth of more than 40%, while China has risen 31%, Japan 21% and Korea 20%.
She explains different usages of index-based products, including ETFs and index futures/options, among institutional and retail investors.
ETFs are increasingly being adopted by intermediaries to help clients build diversified portfolios based on their goals and risk appetite. Institutional investors have passive mandates, and there is also growing interest in rejigging portfolios using ETFs more tactically to take advantage of low costs, ease of access and the buoyant liquidity that ETFs provide.
On index futures and options, Korea has long been active, while India has fast surged into the limelight, driven by flush retail trading demand looking for new investment opportunities.
