What Should ETF Investors Expect in 2019?

What will this year bring for exchange traded fund investors? More exposure to mainland China shares, active ETFs and a focus on ESG

Emma Wall 11 January, 2019 | 12:30AM
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Emma Wall: Hello, and welcome to the Morningstar series, "Ask the Expert." I'm Emma Wall and I'm joined today by Morningstar's Jackie Choy to talk about what ETF investors can expect in 2019.

Hi, Jackie.

Jackie Choy: Hi, Emma.

Wall: Happy New Year.

Choy: Happy New Year.

Wall: So, what can ETF investors expect from 2019? Let's start perhaps with China A shares because that was a big story in 2018.

Choy: Big story in 2018 and it will be a busy year in 2019 again.

Wall: And that's because China A shares are being included in more indexes, aren't they?

Choy: That's correct. So, last year, 2018, we had MSCI first include A shares into the EM indices and also global indices obviously. And for 2019, not just MSCI would potentially increase their weighting in China A shares again but also FTSE will be including China A shares starting from June and then S&P will be including China A shares starting September.

Wall: And so, that potentially means a lot of investors who hold emerging market ETFs and global ETFs will see their exposure, their investment, in mainland Chinese shares increase or even start investing for the first time?

Choy: That's correct, Emma. So, anything that have like EM exposure or global which includes EM exposure will have a little bit of China A share onshore equity in there.

Wall: And what about active ETFs? Because we saw Fidelity launch an active ETF in Australia last year. That was a big news story. Can we expect to see more active ETFs launch this year in the Asia Pac region and even globally?

Choy: Well, potentially. I mean, like for example, in Hong Kong they have revised regulation which allows active ETFs to be launched. But one aspect with that is that active – well, ETF is the distribution channel from our view. For active ETFs to be successful in the ETF space they really need that sort of like a brand name and also familiarity for retail investors for them to be able to get into that distribution channel to get into that fund.

Wall: And so, really, we are not going to see all funds then replicate themselves through an ETF distribution channel? Maybe only some big fames ones?

Choy: I would think so.

Wall: And aren't there different rules depending on the different region as well which may impact whether or not we see active ETFs launched?

Choy: That's a good question, Emma. I think – like, for example, in the U.S., it's required for ETFs to publish their full portfolio on a daily sort of frequency. That sort of deters a lot of active managers to publish their full portfolio which is their skills, right? So, that limits sort of their will to launch active ETFs in the U.S. or through other channels. But in other possible world, for example, Australia, they don't need that daily full disclosure. So, that sort of difference changes the appetite for fund managers to launch active ETFs.

Wall: And what else can we expect from 2019? ESG is a growing theme in investment. Can we expect to see ESG ETFs launched, more of them this year?

Choy: Well, actually, we've seen quite some being launched in the past one or two years especially in Europe and I think this growing theme is a very big topic in the fund industry. Potentially, we can see more of these kinds of ETFs in the region as well.

Wall: And is there an appetite for it? I mean, it's one thing for asset managers to be launching these ETFs; it's another thing for investors to be buying them.

Choy: Well, ESG is a very complicated topic sometimes because everyone has a different ESG in their mind; definition of ESG, what they want in the ESG. So, whether or not to package it into an ETF is another topic for discussion.

Wall: Jackie, thank you very much.

Choy: You're welcome, Emma.

Wall: This is Emma Wall for Morningstar. Thank you for watching.


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Emma Wall  is former Senior International Editor for Morningstar

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