Asia's love of ETFs shows no sign of abating any time soon, and with firms in mainland China racing to be the first to launch an international ETF the market could soon see another steep uptake in demand. Innovative Investor talks to Nick Good, managing director of BlackRock and head of iShares, Asia Pacific, about the reasons behind this and where the growth is going to come from.

Innovative Investor - How big do you think the market for ETFs can grow in 2010, and why? Where is the most demand for them coming from?

Nick Good - The market can grow incredibly quickly. We have seen the demand for ETFs and the launch of new products grow in the last few years. The current Blackrock estimations forecast a growth in ETF assets of between 20%-30% in 2010, and I think those kind of growth rates can be sustained for a substantial period of time across the market as a whole. There are some fundamental reasons for that. Obviously you have got a growing market in general in mutual funds across Asia, but we are seeing a massive demand for ETFs across both retail, intermediary investors and also from institutional users. The sovereign wealth funds, the hedge funds, insurance companies, asset managers as well as retail private bank customers are using them in increasing numbers every year. We have seen in other parts of the world that this tends to build on itself and causes it to accelerate even faster.

Innovative Investor - Was the financial crisis and the mistrust of complex structured products actually good for ETFs?

Nick Good - The financial crisis of 2008-2009 was really an eye-opener for a number of people, where they realised the importance of liquidity and being able to get their money back and the importance of transparency. Things like the Madoff scandal made it clear to people that they need to know exactly what their money is invested in. Those are the core dynamics of ETFs and as such it has been a big driver of demand. The fact that these are easy to use and very versatile has helped too. For a retail investor the fact they can be a low cost, long investment, and for an institutional investor they are very flexible, they can be used for short term positions, for transition trades when institutions are moving money between managers.

Innovative Investor - A recent review from BlackRock said it expected more products from traditional active asset managers and alternative asset class exposures to become available to 'mainstream' retail and institutional investors through standardized and regulated fund structures. Why is this?

Nick Good - The growth of funds flowing into the ETF industry over the last few years has been nothing short of spectacular, with explosive growth in the number of providers in that time too. In 2008 the industry as a whole saw around $272bn of new inflows into ETFs and $121bn outflows from mutual funds. And in 2009 while there was money flowing into both the ETF market was still growing hugely and assets topped $1trillion in 2010. Given that growth I expect to see more players coming in who want to see if they can compete. Every asset manager out there now is looking at this category and asking themselves, should I be part of that?

We have seen that success in other areas of investments does not necessarily equal success in ETFs. If you look at the top three providers of ETFs, they account for over 70% of ETF assets and last time I checked there were over 100 providers. The majority of them have less than $1bn of assets. It is actually quite difficult to be successful in ETFs; there is a complicated support structure to make the exchange traded aspect succeed, and it requires a lot of investment, so it is not clear that all of these providers will succeed. There is room for particular products that have not been tried before to succeed and some of them may come up with interesting unique structures that will succeed but many of these new providers will come into it and not be able to put the kind of structures in place that they need to make ETF products attractive to regular investors and the kind of returns that they would hope to.

Innovative Investor - How to you plan to move iShares forward this year? What new launches are coming up?

Nick Good - Our success has been driven by innovation. We really created this category, launching 50 ETFs in 2000 in the US - which is still the largest single mutual fund launch in the history of the US and we have continued to innovate with the launch of the first fixed income fund, the first A-Share fund, and our recent launch in Hong Kong in November of the China Sectors Fund was another first. I believe we need to push forward with the innovations and there are various aspects of the market which are still not available as ETFs and we continue to investigate those. We stand by a commitment that even with innovative products they must be readily explainable to the average on the street and if it doesn't meet these criteria then we won't do them. We continue to push the envelope with things like our access products, but for that reason we haven't launched inverse or leverage products because of some of the complexities that underpin them. We have built our entire business around this, and we provide a toolkit of ETFs which all live up to the same core qualities.

Innovative Investor - In terms of hedge funds looking to create their own ETFs with their own funds as the underlying exposure in order to broaden their distribution capabilities, what is your view?

Nick Good - There are two main things with hedge funds and ETFs. The first is the importance of daily transparency. With the way hedge funds operate it may be very difficult to provide the daily transparency investors are used to with other ETFs. That is something which may cause some confusion in the overall understanding of ETFs by investors. If the hedge fund is unable to provide that level of transparency because of its trading strategy then that aspect of ETFs no longer applies.

But the second point is that it provides access to hedge funds which they might not have had otherwise - without having to invest a large amount on cash. They also have the benefits of daily liquidity and intraday liquidity which can be very attractive to investors. However that liquidity is not necessarily easy to obtain or to maintain. If you look at the market as a whole you will see that there are a lot of funds which have low levels of liquidity, and if you cannot maintain a high level of liquidity in an ETF then that actually becomes detrimental to the end investor.

Innovative Investor - China ETFs are being seen as an innovative vehicles for international investors to gain exposure to the country's A-Share market. Why is this and what are the pros and cons of this?

Nick Good - The main pro for investors is that otherwise they might not have access to the A-Share market. That's the reason why the A50 has been very well-received by retail investors. The other advantages are the same as with any other ETFs, it is exchange traded, you can take short positions, you can take margin positions on it. It is a diversified basket that tracks a well known index.