Digital Asset ETP Products

 

Originally, digital asset ETPs started as trackers for individual digital assets. Presently, the market offers a broader spectrum of digital asset ETPs, encompassing basket, staking, inverse, and leveraged products, along with specific indices tailored to handle volatility.

Regarding underlying assets, based on recent data compiled by ETFBook and BitMEX Research, and after excluding equity and OTC-traded funds while incorporating additional data, it is observed that among 162 digital asset ETPs, bitcoin, ethereum, and basket products constitute 58%. The remaining 42% comprises a diverse array, including single digital assets from the long tail, as well as short, volatility, and leverage products.

Among the 162 products, 121 fall under the category of ETPs, while 41 are specifically classified as ETFs. This ETF category further breaks down into 16 futures ETFs and 11 pending US spot bitcoin ETFs awaiting launch. Additionally, there are 14 staking products in total, comprising thirteen ETPs and one ETF. Staking products allow investors to capitalize on the staking yield generated by their holdings.

Out of the 14 leading digital asset ETPs by assets, nine are dedicated to tracking bitcoin, constituting 64% of the total. The remaining five encompass three ethereum trackers, one solana tracker, and one Binance coin tracker. Within the set of 14 products, Switzerland hosts four (all from the issuer 21Shares), Canada hosts three, Jersey hosts two, and there is one each domiciled in Germany, the US, and Liechtenstein. Among the top 14 products by assets, four are categorized as ETFs, consisting of three spot ETFs and one futures ETF. Among the ETPs, eight are physical products, while two are classified as synthetic.

Launching new digital asset ETPs comes with various considerations and constraints. These encompass adhering to regulatory and stock exchange stipulations, obtaining necessary approvals, meeting liquidity prerequisites, gauging investor demand, and ensuring access to public price data and fiat trading pairs. Despite these challenges, ongoing product innovation persists, driven by the entry of more participants into the market. Issuers and index providers are actively seeking to secure market share and set themselves apart. Simultaneously, the growing understanding and acceptance of this asset class among regulators, service providers, and investors contribute to the evolving landscape.

ETPs impose management fees, also known as expense ratios or sponsor fees, to cover the expenses associated with managing and operating the products. These fees are typically calculated annually as a percentage of the holdings and are deducted from the Net Asset Value (NAV) either on a daily basis or at regular intervals. In the early stages of crypto ETPs, some were able to charge relatively high fees, reaching up to 2.5%, whereas the usual range for ETP fees falls between 0.05% and 0.75%. The fact that certain crypto ETPs, despite charging 2.5% when alternatives offer fees as low as 0%, have accumulated significant Assets Under Management (AUM) underscores the stickiness and the advantage of being a first mover in this space.

Moving forward, fees are expected to be a pivotal point of differentiation for new products, as exemplified by the recent developments in the US spot ETF arena. Notably, Invesco/Galaxy announced a fee waiver for the initial six months and the first $5 billion in assets, while Fidelity proposed a fee of 0.39%. As of January 8th, announcements from other issuers affirm that a competitive landscape for fees is indeed emerging (see link for reference “Race to zero and impact of Terrordome : US spot bitcoin ETF frenzy continues”).

Asset managers who overlook ETF/ETPs with the notion that they exclusively cater to passive strategies are overlooking the essence of these investment vehicles. An ETF/ETPs serves as a distribution technology applicable to various investment styles or strategies. The momentum behind ETF growth persists due to robust regulatory, demographic, and structural factors. Projections suggest that the European ETF market will expand significantly, potentially tripling to $3 trillion by 2029. It’s evident that there exists a substantial fee opportunity for asset managers to capture, maintain, or forfeit.

 

 

  • European ETFs enjoy highest quarterly inflows on record: Morningstar
    by Beverly Chandler on July 15, 2024

    Morningstar has released its European ETF asset flow update for Q2 2024 which shows that the European ETF and ETC market gathered EUR52.9 billion of flows in the second quarter of 2024, up from EUR45 billion in Q1 24; the highest quarterly figure on record.

  • As ETFs rise in popularity, individuals take charge while issuers race to meet demand
    on July 13, 2024

    Captivated by the spectacular rally in global markets this year, Fredric Luk embarked on his investment journey with high hopes, handpicking a few promising stocks. But after being burned by some ill-fated bets, he quickly sold his entire equity holdings in US tech firms and funnelled his investments into a handful of exchange-traded funds (ETFs). "Buying individual stocks comes with quite a few risks, especially when you're not exactly familiar with the market, plus there's a time difference [in the trading hours of different markets]," said Luk, 25, a consulting professional in Hong Kong. "It makes more sense for me to get broad market exposure." Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyses and infographics brought to you by our award-winning team. Luk is part of a growing tribe of investors in Asia piling into ETFs. These low-cost, diversified and transparent instruments are increasingly becoming the go-to choice for both retail and institutional investors, with the region seeing the fastest growth in the world. The total assets of ETFs in Asia-Pacific, excluding Japan, have grown nearly 15 per cent to a record US$890 billion in the first five months of the year, in addition to the 36 per cent growth in 2023, according to ETFGI, an independent research and consulting firm. Net inflows of US$118 billion during this period are the highest ever for the region, marking an unprecedented 35 consecutive months of inflows. Including Japan, Asia's ETF market now exceeds US$1.3 trillion and is on track to double in size, reaching at least US$2.5 trillion by 2028, according to a recent PwC report. That means it could become the world's second-largest ETF market after the US, and the strongest demand is expected to come from retail investors, the report added. "In a market where investors are young, sophisticated and doing more of their own homework on what they buy, ETFs have become popular," said Eugenie Shen, managing director and head of asset management at the Asia Securities Industry and Financial Markets Association (ASIFMA). First launched in the US in 1993, ETFs pool together a basket of different securities that typically track an index or a benchmark, and aim to deliver returns that match the overall underlying market. Similar to other securities, investors can buy or sell ETFs through their brokers anytime during a market's trading hours. That gives the product several advantages. Compared with individual stocks or bonds, an ETF gives investors broader market exposure through a single vehicle. And unlike mutual funds, which usually require intermediaries such as banks for access, it cuts out the intermediaries, thereby lowering the cost for investors. In another boost to ETFs in Hong Kong and China, a total of 91 ETFs have been added to the cross border trading link between the two sides, giving investors more trading options. The Shanghai, Shenzhen and Hong Kong stock exchanges added 85 ETFs in the northbound channel, which allows foreign investors to buy mainland-listed A shares, and six in the southbound link, which allows investors in mainland China to buy select companies listed in Hong Kong. The expanded ETF list takes effect from July 22. Institutional investors have long been implementing their strategies by utilising ETFs as "building blocks" of their portfolios, according to Antoine de Saint Vaulry, director and regional head of ETF sales and business development at Citi in Hong Kong. "That is starting to happen in the retail space and is gradually taking off." Major Asian markets such as China, Taiwan, India, South Korea, Japan and Australia have seen a "massive wave" of retail adoption in recent years, driven by regulatory and industry efforts to promote ETF investing, de Saint Vaulry added. With ETFs' growing status as the region's hottest investment products, issuers both global and local are jostling for a slice of the pie. Their products range from traditionally passive index-linked ETFs to actively managed and novel themes, catering to diverse investor appetites. "Institutional investors are buying because they know ETFs are cheaper, and they use them to fill out their portfolios," said ASIFMA's Shen. "Individual investors, when they do their research, can easily figure out what to buy." BlackRock, Vanguard and State Street, the top three indexing giants that together control 66 per cent of the world's US$12 trillion in ETF assets, are also capturing some of the biggest chunks of inflows in the region. "It's really about the breadth and depth of products we offer - from indexing to active strategies across different asset classes such as equity, fixed income, commodities and even cryptocurrency," said Andy Ng, head of iShares equity product strategy solutions at BlackRock. "We have over 1,400 ETFs globally." Ng said Asian investors do not just invest in locally domiciled products, but want global exposure as well, adding that BlackRock was giving them more options to choose from. "It could be a 'winner takes all' industry, and for the early entrants that already have an established presence, people tend to go to them naturally," said Ding Chen, CEO of CSOP Asset Management, a Hong Kong-based fund manager with US$14.7 billion under management. The company last November launched the CSOP Saudi Arabia ETF in Hong Kong, the first ETF in Asia that tracks the Gulf nation's biggest companies. "The competition is intense for sure," she said, adding that the key is to focus more on local and regional opportunities. For example, Nvidia's surge is driving stellar rallies in Asian chip companies such as Taiwan Semiconductor Manufacturing Company and Samsung, and some of CSOP's ETF products tracking these stocks have seen strong inflows. "Local investors are more familiar with these names, so it's easier for them to understand. That means we can catch the demand for diversification," Ding said. Mirae Asset Global Investments, a South Korean firm with US$250 billion under management, says the company's team of ETF-dedicated researchers look at the wider economy and markets to identify long-term growth themes. An ideal thematic product would be non-cyclical, with long-term secular, structural growth potential that could become a mega trend, said Youngrae Cho, chief operating officer at Mirae Asset Global Investment (Hong Kong). K-pop companies, lithium battery makers, Japanese Reits that invest in hotels and commercial facilities, and China's "little giants" - firms eligible for preferential treatment to help the country become a stronger technological powerhouse - are among Mirae's ETF themes. "The phenomenal level of growth that we have seen globally in ETFs until now has been driven by passive ETFs," Cho said. "But as ETFs continue to develop and more investors, both institutional and retail, adopt ETFs into their portfolios, the use cases and demand will diversify and expand." The growing popularity of ETFs has seen them quietly overtake mutual funds. Last year, nearly US$800 billion flowed out of mutual funds globally, while ETFs attracted US$800 billion in inflows. JPMorgan Asset Management, traditionally an active fund house, has been ramping up efforts to reinvent itself by converting mutual funds into active ETFs. The firm, having seen success in the US and Europe, is eyeing similar growth in Asia. The idea behind active ETFs is simple - they combine the benefits of passive index-tracking to give investors exposure to the broader market, while also leveraging portfolio managers' stock-picking skills to identify mispriced securities and capitalise on that. This active management overlay aims to lead to outperformance compared with a pure index fund. The ETF structure means it still has the daily disclosure and intraday liquidity, which also enables direct distribution to investors and eliminates the need for intermediaries. "It is like taking the development of a mutual fund further; it's a superior vehicle," said Philippe El-Asmar, managing director and head of ETF, direct and digital for Asia-Pacific at JPMorgan Asset Management based in Hong Kong. "It has more transparency, more liquidity and more cost efficiency compared with a mutual fund." In the last few years almost all portfolio managers, barring a few exceptions, have become more comfortable with using ETFs to deliver their strategy, he added. This shift underscores the pressures facing traditional actively managed mutual funds. Take the US, for example, where less than one-third of the mutual funds outperformed the average of their passive ETF rivals over the 10-year period up to December 2023, according to Morningstar research. This underperformance undermines the primary selling point of active mutual funds - their promise of higher returns justifying higher fees. The average expense ratio, the percentage of assets paid to run the fund, was 0.48 per cent for passive ETFs and 1.02 per cent for actively managed mutual funds in 2023, according to Morningstar. "One factor driving ETFs' growth is the structural decline in alpha generation from active mutual funds," said Hao Zhang, head of business development for China at Mirae Asset. "As markets become more efficient, it's very difficult to consistently beat benchmarks." !function(){"use strict";window.add

  • What are ETFs? How have they become the new darling of investors globally?
    on July 12, 2024

    Exchange-traded funds (ETFs) have quickly won favour among investors globally in recent years, with many choosing the passive investment product over actively managed ones because of lower costs and convenience in trading. Investors continue pouring money into ETFs despite a challenging investment landscape, including entrenched inflation and a flare-up in geopolitical tensions. China is no exception to the trend, with ETFs even becoming a key channel for state-backed funds to prop up the market. Inflows into ETFs linked to the underlying CSI indices of small and big-capitalisation stocks have seen spikes since early this year in an increasing sign of state buying to revive confidence in the broader market. Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyses and infographics brought to you by our award-winning team. What is an ETF? An ETF is a type of passive investment product that typically tracks a basket of assets such as stocks, bonds, currencies, commodities and even futures contracts. Just like ordinary shares, an ETF can be freely bought and sold on stock exchanges during trading hours, an advantage over traditional mutual funds, which investors can only buy or sell once a day after the end of the day's trading. Most ETFs are index-based and they mimic the composition and the performance of a specific gauge, such as the S&P 500 Index or the Hang Seng Index. The first ETF was launched in 1993 in the US, and after three decades of development, the total assets under management (AUM) of ETFs globally stood at US$11.5 trillion at the end of 2023, according to PwC. Globally, ETFs recorded inflows of US$800 billion last year, while a similar amount was withdrawn from mutual funds. BlackRock, Vanguard and State Street are the world's top three managers of ETF products, accounting for about two-thirds of the market. Why have ETFs become popular with investors? First, ETFs give holders exposure to a broader asset class, an index or an industry through a single vehicle, sparing investors the trouble of picking stocks that sometimes can prove to be challenging even for professionals. Second, ETFs have lower trading costs. Index-based ETFs charged an average 0.5 per cent in fees in 2023, compared with 0.8 per cent for index-based mutual funds, according to US research firm Morningstar. Third, increased volatility in global financial markets has made it difficult for actively managed funds to outperform the benchmarks and deliver above-average returns, boosting demand for passively managed products. The demand has also been bolstered by demand from expanding global pension funds seeking stable investment returns. In 2023, active fund managers saw mixed success. More than 60 per cent of such fund managers beat passive peers targeting large-capitalisation stocks and the healthcare sector, while less than 30 per cent outperformed in sectors ranging from consumer goods and technology to telecoms, according to Morningstar. How far have ETFs come along in Asia and China? The AUM of ETFs in Asia totalled US$1.3 trillion at the end of May, according to independent research firm ETFGI. An influx of US$118 billion was recorded in the first five months of the year, a 16 per cent year-on-year increase, ETFGI said. The AUM of China-domiciled ETFs reached 1.82 trillion yuan (US$250.3 billion) at the end of 2023, more than double that at the end of 2020, according to Morningstar. Inflows rose to a record 604.3 billion yuan last year, almost five times the figure in 2021, it said. China had 870 ETFs at the end of last year, of which 96 per cent were stock-based products. ETFs tracking bonds numbered only 17, Morningstar said. Who are the biggest players in China? China Asset Management, E Fund Management and Huatai-PineBridge Fund Management are the top three ETF managers in China, according to Morningstar. China Asset's ETF AUM totalled 392.2 billion yuan in 2023 and that of E Fund and Huatai-PineBridge stood at 256.9 billion yuan and 193.8 billion yuan, respectively, the firm's data showed. The trio accounts for 46 per cent of the domestic ETF market. The biggest China-domiciled ETF is the 195.2 billion yuan Huatai-PineBridge CSI 300 ETF, which tracks the underlying CSI 300 Index and trades on the Shanghai exchange, according to Bloomberg data. This article originally appeared on the South China Morning Post (SCMP), the leading news media reporting on China and Asia. For more SCMP stories, please download our mobile app, follow us on Twitter, and like us on Facebook. Copyright (c) 2024. South China Morning Post Publishers Ltd. All rights reserved.