Assets invested in ETF Industry in Japan and ESG reach new records at end of May

Dan Barnes Welcome to EFT TV, I’m Dan Barnes. Joining me today is Deborah Fuhr, CEO of ETFGI. We’re going to discuss the ETF markets in Japan and some of the trends in ETFs for ESG, so that’s environmental, social and governance investing. Debbie, welcome to ETF TV.

Deborah Fuhr Thank you.

Dan Barnes So the Japanese central bank has been investing in ETFs for some time, something we’ve now seen the US Federal Reserve start to do. Japan’s got record assets under management in the passive space right now. What can you tell us about the Japanese market and any trends that have been occurring there?

Deborah Fuhr So when we look at Japan, the central bank or Bank of Japan has been buying ETFs since 2012, so for quite some time. They currently own about 70% of all the assets in the ETF industry there. And currently it’s the only place globally where assets are at a record level. So we’re just shy of record levels in most other markets. And flows have been going into the Japanese market much faster than other markets. So right now we have 41 billion dollars of net new assets that have gone into the Japanese market. Last year at this point, we had 17 billion and all of last year we had 37 billion. So we’ve already seen in the first five months a lot more money going into the market. It is unique, though, because most of the products are domestic and it’s not typical that ETFs from the US or Europe would be cross-listed in trading there. Many of the US-listed ETFs are registered for sale and they’re sold by the online brokers. So many Japanese investors like to buy the ETF that are listed in the US. They buy them listed in the US, so not cross-listed, and they do it often through the online brokers who are actually writing research about what’s happening in the US market. So they do like ETFs in US, but they are being traded back there in the home market.

Dan Barnes And how does Japan compare to other markets such as the rest of Asia Pacific, Europe, etc.?

Deborah Fuhr So it is interesting when we look at the size of the Japanese market, it is nearly double Asia Pacific excluding Japan. So in terms of assets being at 416 billion, it’s quite large. And if you think of Europe, which has more than 21 countries represented, we have 971 billion, while Japan alone has 416 billion. You compare it to Canada, we have 154 billion. So Japan actually has a lot of money invested in ETFs locally. But you have to remember293 billion of that is from the central bank, so it is an important component of that landscape today.

Dan Barnes Absolutely. Do you think there’s any trends that we can see in terms of central bank purchasing in Japan that we might see mirrored in the US?

Deborah Fuhr Well, it’s interesting because the central bank in Japan has been buying equity focused ETFs. As we know, the Fed in the US has been buying Fixed-Income, primarily investment grade and high yield. So I’m not sure that we’ll see it move to equities, but never say never, right, because we’ve seen that the Fed buying ETFs was quite surprising when it first started. And clearly it does have the ability to decide to move to something else. So I think we’ll have to watch and see what happens going forward.

Dan Barnes Another area for markets that’s seen record assets under management is the environmental, social and governance focused ETFs, which are booming at the moment. And it seems that Europe is the hub there.

Deborah Fuhr So it’s interesting. I mean, it’s partially driven by the EU taxonomy, the focus by many of the governments, in terms of causing the asset owners to invest with an ESG lens, but what we’re seeing is, if you look at the assets globally, we’re at a record level of 82 billion dollars invested. So it’s not large, relative to other things, but it is growing quickly. We ended the year with 58 billion, and if we look at the flows going in, we’re at a record level year to date of 28 billion dollars having been invested, net new. And if we were to look at that 82 billion, one thing that’s quite interesting is 40 billion is invested in ETFs domiciled in Europe. And so why is that unique? Because if you think about the global landscape of the 6.11 trillion dollars invested in ETFs, 70% of those assets are in US domiciled products. So to have Europe be larger than the US is quite unusual in any segment of ETFs. And clearly, I do think that Europeans are really much more focused on these issues, the Paris Accord and other things. So I do think it’s not surprising in some ways, but it is unique when you kind of look at the numbers and can demonstrate it to people.

Dan Barnes And are there any trends within that ESG umbrella, which are driving more investment?

Deborah Fuhr Yeah, and I think some of it comes down to what we’re seeing now. So, of course, a lot of the focus is on broad ESG, right. It’s looking at various factors. But we do see that there is a focus on products towards themes like clean energy, low carbon. And we also see that social inclusion is another area where net money going in, especially in the past month. So you’re seeing that people are voting with their money in terms of what they think the world should be doing, or what they feel they should be doing to support improving the earth and improving society.

Dan Barnes That’s great. Deborah, that’s an excellent thank you.

Deborah Fuhr Thank you.

Dan Barnes I’d like to thank Deborah for her expertize and of course you for watching. To catch up on our other shows, go to ETFTV.NET or TRADERTV.NET.

Published on June 24, 2020