The Asian market for ETFs is lagging behind the US and Europe in terms of size but it is rapidly growing, and the GFC has been instrumental in pushing people out of more traditional structures and into ETFs. However, there are some areas which need to be addressed, and Innovative Investor speaks with Joseph Ho, head of ETF sales and marketing in Asia for Lyxor about the implications of the lack of a pan-regional regulatory regime.

II - What new strategies will you be pursuing in 2010?

Joseph Ho - Lyxor is a pioneer in cross-listing ETFs into Asia. We cross-listed our first ETF on SGX in October 2006 followed by a similar effort in Hong Kong in April 2007. To date, we have 20 ETFs listed in Singapore and 12 in Hong Kong. We expect the number of listing in Hong Kong to catch up to that of Singapore's by 1Q10. Thus far, our product range provides coverage to major developed and emerging equity markets and broad-based commodities. Regional investors can easily make use of Lyxor ETFs (and other products) to effect global diversification, execute asset allocation/portfolio construction and customize investment solutions. For 2010, we would continue our product development but with a heavier emphasis on those with Asian themes.

II - Investors seem to be inexorably moving towards ETFs as a replacement for more established investment structures, do you think the outflow from things such as mutual funds into ETFs will continue? Why?

Joseph Ho - It is true that ETFs gained tremendously from their mutual fund counterparts in 2008 with substantial net inflows during a very difficult year. When global equity markets started their strong technical rebound in 2Q09, ETFs, once again, gained assets at a faster rate. We believe that as long as the markets remain uncertain and volatile, investors would continue to prefer the robustness of passive management and all the convenience, cost-efficiency, transparency and liquidity characteristic that come with investing through ETFs.

II - Why has the Asian market for ETFs not taken off in the same way the European market has? Where do you see the market at the end of 2010?

Joseph Ho - Despite an early start, the ETF industry in Asia has fallen behind that of Europe both in terms of number of products and AUM. The main culprit is a lack of a pan-regional regulatory regime to allow Asia domiciled ETFs to trade across the region in order to attain the necessary economies of scales, like what UCITS did for European ETFs. Market fragmentation and small market sizes led to a dearth of products, participants and investor awareness. Lyxor's effort in cross-listing (soon to be followed by others) has led to a revival in ETF interest and additional listings.

The current global financial crisis has also helped highlight the benefits of ETFs over traditional products resulting in a strong growth momentum in the Asian ETF industry in the past 12 month. We expect this trend to continue in 2010 with new product development and cross-listing spreading to other Asian markets outside of Hong Kong and Singapore.

II - Cross-listing ETFs has proved to be successful in 2010 but is this now saturated? Where do you go next?

Joseph Ho - Cross-listing remains an effective and cost-efficient means of product development in the face of a lack of economies of scales in smaller markets. As such, we would likely see the practice accelerated and spreading to other Asian markets such as Korea, Malaysia, Taiwan and possibly Thailand. In some of these smaller markets, cross-listing may take the form of feeder ETFs and not direct cross-listing as in the case of Hong Kong and Singapore.

II - How do you think regulators in Asia feel about ETFs? Is there an in depth understanding of the benefits and risks?

Joseph Ho - We believe regulators in Asia understand the general concept of ETF and their benefits/risks. However, the global ETF industry has been growing by leaps and bounds, especially in product development. As such, we would not be surprised that many regional regulators might have fallen behind the curve and become more cautious about certain types of products, such as the leveraged/short strategy ETFs and commodity ETFs.

Additionally, in the smaller Asian markets, regulators would also be grappling with striking a balance between the benefits of ETF offered to investors and the potential impact of ETFs on the traditional mutual fund industry, or more importantly, cross-listed ETFs on the local fund industry.