SHINING THROUGH:

ETF Opportunities in Greater China

2019 Global ETF Investor Survey:

Greater China Results Supplement
Foreword
The growing exchange-traded fund (ETF) market represents a US$5.1 trillion
industry. Greater China represents just 2.1% of the global market, but is
poised for growth. To provide global context, the US represents more than
70% of the ETF market reaching nearly US$3.6 trillion in AUM, while the
European market reached US$793 billion in 2018.1
For our sixth consecutive year providing insight into market also have distinct views on key criteria for selecting
the investor uses of ETFs, we produced a global survey, ETFs. In Mainland China, ETF issuer brand was the most
capturing responses from institutional investors, financial important factor for ETF selection. While in Hong Kong
advisers, and fund managers in the US, Europe, and and Taiwan, investors focused on track record, noting how
Greater China. To provide further detail on the Greater historical performance impacted their product choice.
China region, we developed this supplement, which
focuses on the responses from three key markets: From a product perspective, investors selected core index
Mainland China, Hong Kong, and Taiwan. These responses (Mainland China) and smart beta (Hong Kong and Taiwan)
identify important trends, highlight changing sentiment, as the strategy they want to see more of in their local
and explore areas of innovation in the Greater China markets, followed by ESG (Mainland China and Taiwan)
ETF marketplace. and core index (Hong Kong). Actively managed ETFs
secured the third ranking across all three regions.
Respondents across the region helped to illustrate where
consensus exists, while also showcasing some of the Finally, ETF passporting between the Mainland and Hong
nuances in investor outlook and product appetite across Kong remains on top of the wish list for the ETF industry.
the three markets. Like last year, Mainland Chinese investors’ interest in
accessing Hong Kong ETFs remains strong, but the
Growth in the region is closely aligned with Mainland industry awaits further clarity on which program (Stock
China, which presents a significant opportunity as the Connect or Mutual Recognition of Funds) will be the
onshore asset management industry continues to mature conduit for cross-border access.
and internationalize. Known as the world’s bridge to
Mainland China, Hong Kong is well positioned to capitalize Issuers should consider the findings in this report as they
on this growth, while Taiwan has been one of the fastest refine their product development plans, marketing, and
growing ETF markets across Asia with a high level of distribution strategies, as well as on-going client service
product innovation. and education. While much of the market commentary
forecasts a turbulent year for the global markets, our
As evident in the responses, ETF adoption and usage are respondents have shown willingness to keep ETFs at the
at varying stages across Greater China. Investors in each center of their portfolios.

1
ETFGI

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Key Findings
Historical performance and ETF issuer
are top of mind.
In lock step with US and European investors, historical
performance was cited as the most important selection
criteria for investors in Hong Kong and Taiwan, highlighting
interest in products that can mitigate risk or generate
outsized returns. In Mainland China, however, ETF issuer
and index methodology stood out as the top drivers of
ETF selection.
Holdings in ETFs are set to rise,
especially in Mainland China.
63% of respondents in Greater China plan to increase the
ETF allocation within their portfolios in the next 12 months.
In Mainland China, however, 77% plan to increase their ETF
allocations. Over 60% of respondents in Mainland China have
at least a quarter of their AUM in ETFs – nearly double the
amount reported last year.
Global interest in Mainland China
continues to grow.
Roughly 70% of European and US respondents have
plans to invest in the China capital markets this year.
These investors were split as to how they will execute that
investment with half planning to leverage ETFs and half
expecting to make direct investment through the existing
inbound access schemes (RQFII, Stock connect, etc.)
Contents
Key Findings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Demographics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Greater China ETF Market in Context. . . . . . . . . 5
ETF Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Accessing Mainland China. . . . . . . . . . . . . . . . . . . . . 12
Active and Smart Beta . . . . . . . . . . . . . . . . . . . . . . . . 15
ETFs and Market Exposure . . . . . . . . . . . . . . . . . . . . 18
Potential Headwinds for ETFs. . . . . . . . . . . . . . . . . . . 21
Looking Ahead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Smart beta is catching assets from
mutual funds, moving the products
from newcomer to portfolio staple.
97% of respondents in Greater China have at least one
smart beta ETF in their portfolio. 38% of respondents
purchased a smart beta ETF in the last 12 months to replace
an actively-managed mutual fund. Investors in Taiwan were
the most active in using smart beta ETFs to replace active
mutual funds with 65% of respondents having done so in
the past year.
Active, smart beta, and ESG products
round out the ETF wish list.
The top ETF strategies respondents most want to see listed
in their local market are active, smart beta, environmental,
social, and governance (ESG), and core index.
Mainland investors show strong
interest in accessing Hong Kong ETFs.
98% of Mainland China respondents are interested in buying
Hong Kong ETFs either through the Stock Connect or Mutual
Recognition of Funds (MRF) programs. If granted access to
Hong Kong ETFs, Mainland investors selected Hong Kong
and Asia Pacific equity ETFs as the products with the highest
potential for demand.
2019 Greater China ETF Investor Survey Results | 3
Demographics
Brown Brothers Harriman (BBH), in partnership with ETF.com, recently surveyed 300
institutional investors, financial advisers, and fund managers from around the world (100
in the US, 100 in Europe, and 100 in Greater China – including Mainland China, Hong
Kong, and Taiwan). This supplemental report takes a closer look at the Greater China
responses. In Greater China, the sample consisted of 27% institutional investors, 61%
financial advisers, and 12% fund managers. All respondents invest in ETFs and are aware
of their institution’s overall investment strategy.

Unless otherwise indicated, data sources for all results are BBH surveys and all numbers are in US dollars.

Respondent Primary Business Activity

61 %
Financial Advisers

27 %
12 % Institutional Investors

Fund Managers

100 Greater China Respondents

4|
The Greater China ETF Market in Context
Mainland China is driving ETF usage in the region
Comparing ETF investment across regions reveals a maturing global ETF market. Globally, the majority of respondents (67%) hold
11-50% of their portfolios in ETFs. That number is 66% for the US, 60% for Europe, and 73% for Greater China. On the upper end of
the AUM spectrum, 13% of both US and European investors said ETFs made up at least half of their portfolios. This compares with
just 7% in Greater China.

Ongoing education efforts around the structural benefits of the ETF wrapper seem to be resonating as 38% of Greater China
respondents have at least 26% of their AUM in ETFs. This represents an increase of 7 percentage points from the 2018 BBH
Greater China ETF Investor Survey. This increase was driven by Mainland China respondents, where 63% of respondents have
at least 26% of their AUM in ETFs — nearly doubling from 32% last year.

Please indicate the percentage of your AUM invested in ETFs/ETNs:

60% Mainland China Hong Kong Taiwan Greater China Total Global Total

53%
50% 48%

45%
42% 42%
40%
40%
Percent of Respondents

30% 31%
30%

25%
22% 22% 22%
20%
20%
15% 15%

10% 9%
7% 7%

3% 2%
0% 0% 0%0% 0% 0%
1-10% 11-25% 26-50% 51-99% 100%

Share of AUM

2019 Greater China ETF Investor Survey Results | 5

Holdings in ETFs set to rise, especially in Mainland China
In a sign that the Greater China ETF market will continue to grow, the majority of respondents (63%) plan to increase their ETF
investments in the next 12 months, up from 56% last year. Mainland China investors propelled the increase with 77% of investors
expecting to increase allocations to ETFs this year, compared to 43% last year. This interest is aligned with growth in the Mainland
China ETF market, where assets grew by 31% in 2018.2

Do you expect your use of ETFs to increase, decrease, or stay the same over the next
12 months?

13%
27%

63% 61%

26%
10%

Greater China Total Global Total

23%
25%
40%

0% 77% 55% 50%

20%

10%
Mainland China Hong Kong Taiwan

Increase Decrease Stay the same

2
ETFGI

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ETF Selection
Historical performance and ETF issuer are top of mind
When selecting ETFs, investors’ top three criteria in Greater China are historical performance, expense ratio, and ETF issuer. Last year,
index methodology ranked first, followed by historical performance, and a tie between trading spreads and trading volume.

The emergence of historical performance may come as a surprise to those who subscribe to the conventional wisdom that cost is
the single most important criteria for ETF selection. Results show expense ratio is significantly less important to investors in Greater
China compared to the US and Europe. As ETF adoption by retail investors in Greater China is still at a nascent stage, perhaps
investor sensitivity to fees is less acute than in other regions. When compared with regional mutual funds, ETFs on the higher end
of the expense ratio – such as active or smart beta ETFs -- still often present a significant cost value.

When selecting ETFs, rank your top three in terms of importance:

Mainland China Hong Kong Taiwan

T1 ETF Issuer 1 Historical Performance 1 Historical Performance

T1 Index Methodology 2 Trading Spreads T2 Tracking Error

2 Historical Performance 3 Expense Ratio T2 Index Methodology

3 Trading Spreads ETF Issuer 3 Trading Volume

Trading Volume Index Methodology Trading Spreads

Tracking Error Trading Volume ETF Issuer

Expense Ratio Tracking Error Tax Efficiency

Tax Efficiency Tax Efficiency ESG Factors

ESG Factors ESG Factors Expense Ratio

2018
1 Index Methodology T1 Expense Ratio 1 Trading Spreads

2 Historical Performance T1 Trading Spreads 2 Trading Volume

3 Tax Efficiency T1 Trading Volume 3 Index Methodology

2019 Greater China ETF Investor Survey Results | 7

Investors are comfortable buying ETFs with low AUM
Nearly all investors have a “rule of thumb” for a new ETF before investing. In Greater China, many investors are comfortable
buying ETFs with low AUM: 47% said they would buy a new ETF with less than $24 million in assets. In last year’s survey, 41% of
respondents preferred $50 million as their minimum fund size. Given the nuances with ETF seeding and recent trends for larger
issuers self-seeding new ETFs (thereby underscoring commitment to their product set), perhaps investors are more willing to take
on the risk of a newly launched ETF with lower AUM.

Even though investors are comfortable buying ETFs with smaller AUM, many institutions keep a $100 million threshold as the
preferred minimum fund size. 41% of Mainland investors and 36% of Hong Kong investors prefer an ETF with at least $100 million
in AUM, while only 10% of investors in Taiwan use $100 million as their “rule of thumb.”

What is your “rule of thumb” for minimum AUM for a new ETF before you’ll invest?

Mainland China Hong Kong Taiwan Total

5%
I don’t have a 0%
rule of thumb 5%
3%
3%
More than US$1 billion 3%
0%
2%
3%
US$500 - 999 million 8%
0%
4%
10%
US$250 - 499 million 5%
0%
6%
25%
US$100 - 249 million 20%
10%
20%
12%
US$25 - 99 million 17%
30%
18%
32%
US$1 million - 24 million 22%
25%
27%
10%
Under US$1 million 25%
30%
20%

0% 5% 10% 15% 20% 25% 30% 35%

Percent of Respondents

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Investors are looking for more smart beta and ESG ETFs
The top ETF strategies that respondents most wanted to see listed in their local market are active, smart beta, ESG, and
core index.

In Hong Kong, respondents marked smart beta as the top strategy they want to see more, even as nearly 30% of the new ETF
listings on HKEX over 2017 and 2018 were smart beta products.3

The interest in active management is also an area to watch this year in Hong Kong. In January, the Hong Kong Securities & Futures
Commission (SFC) announced regulations allowing issuers to launch active ETFs. Active management continues to have a strong
position in Asia and the ability to launch active strategies in a low-cost wrapper could be attractive to investors. Currently, active ETFs
are not allowed by the respective regulators in the Mainland or Taiwan.

Demand for ESG strategies is increasing with Mainland and Taiwanese investors ranking it in their top two choices. Across Greater
China, there currently is only one ESG ETF,4 which is in Mainland China; however, regulators have been taking steps to increase
adoption of socially responsible investing. The China Securities Regulatory Commission has introduced new reporting obligations
for listed companies to disclose ESG risks in their annual reports. The Hong Kong SFC announced their green finance strategic
framework late last year, which focuses on several initiatives including its own disclosure requirements of environmental information
for listed companies. Institutions have been the first movers when it comes to ESG adoption and Taiwan is a great example: the
Bureau of Labor Funds (pension) has been an active allocator to ESG mutual funds since 2016. ESG ETFs are still new globally, but
given increasing interest from respondents, this will be an area to watch in 2019.

In which of the following areas would you like more ETFs to be available in your local market?

Mainland China Hong Kong Taiwan

1 Core Index 1 Smart Beta T1 Smart Beta

2 ESG 2 Core Index T1 ESG

3 Active 3 Active 2 Active

3 Leveraged/Inverse Leveraged/Inverse 3 Currency Hedged

Smart Beta ESG Core Index

Managed Risk/Low Volatility Thematic Managed Risk/Low Volatility

Currency Hedged Managed Risk/Low Volatility Leveraged/Inverse

Thematic Currency Hedged Thematic

2018
T1 Traditional Beta 1 Traditional Beta 1 Smart Beta

T1 Smart Beta T2 Smart Beta 2 Leveraged/Inverse

2 Leveraged/Inverse T2 ESG 3 ESG

3
HKEX
4
ETFGI

2019 Greater China ETF Investor Survey Results | 9

Investors also want to see more fixed income and US equity ETFs
The top asset classes that investors across the region think could use more ETFs are fixed income, US equity, commodities
(including gold, oil, metals, energy, food, etc.), and alternatives. These selections might be attributed to investors seeking a flight to
more stable and less correlated asset classes given the market volatility experienced in 2018, and which some expect will continue
through 2019.

Which asset classes do you think could use more ETFs in your local market?

Mainland China Hong Kong Taiwan

1 US Equity 1 Fixed Income 1 US Equity

2 Fixed Income 2 US Equity 2 Fixed Income

T3 Commodities 3 Alternatives 3 Commodities

3 T3 Greater China Equity Commodities Greater China Equity

Alternatives Greater China Equity Alternatives

European Equity European Equity European Equity

10 |
2019 Greater China ETF Investor Survey Results | 11
 Accessing Mainland China
US and European investors set to increase allocations to Mainland China
Given its growing importance in the global economy, outside investors are increasing their exposure to China. This is aligned with
China’s ongoing index inclusion process, which began in 2018 when MSCI started to include A-shares in their flagship Emerging
Markets benchmarks. In February 2019, MSCI announced the next stage in A-shares index inclusion. The existing inclusion factor
of 5% in the Emerging Markets index will be increased to 20% through three steps that will be completed by November 2019.
The A-shares weight in the pro forma Emerging Markets index will increase to 3.3% after the completion of the three steps.
Analysts expect close to $70 billion of inflows into Chinese A-shares in 2019 with index inclusion being a driving factor.5

Also, in January 2019, Bloomberg confirmed that Chinese government and policy bank bonds will begin to be added to the
Bloomberg Barclays Global Aggregate Index in April 2019. The inclusion process will take 20 months and analysts expect $150
billion of inflows into the China bond market from this process.6

With additional China equity inclusions and the first China fixed income index inclusion scheduled for 2019, investors will need to
allocate to China or risk tracking error for their passive strategies. ETFs are well positioned as access tools, especially for asset
managers in the US and Europe who may not want to manage the operational complexity that comes with direct investment
access via the existing inbound access schemes.

69% of US and 71% of European respondents have plans to invest in the China capital markets this year with a relatively even
split between leveraging ETFs and making direct investments through the existing inbound investment channels.

If you are going to invest in China over the next 12 months, how do you plan to do so?

US Europe Hong Kong Taiwan Global

31%
Have no plans to add 29%
China exposure this year 50%
50%
22%

35%
Plan to directly invest via inbound channels 34%
(Stock Connect, QFII, RQFII, Bond Connect, etc.) 45%
30%
37%

34%
37%
Plan to use ETFs to invest
5%
20%
41%

0% 10% 20% 30% 40% 50% 60%

Percent of Respondents

5
Morningstar
6
”China’s Capital Markets: A Progress Report.” FT Alphaville, 2019.

12 |
Mainland investors have a slight preference for cross listing when accessing
Hong Kong ETFs
When the extension of the Shanghai-Hong Kong Stock Connect program to Shenzhen was announced in August 2016,
a commitment to someday include ETFs in that program was included as well. Since then, normalizing the settlement
infrastructure between the respective exchanges has been one of the issues delaying the inclusion of ETFs. As a result,
regulators have begun to review alternative options for mutual market access for ETFs, including cross listing ETFs, through
the existing MRF program that is already in place for mutual funds between the Mainland and Hong Kong.

When asking Mainland investors about their preference for accessing Hong Kong listed ETFs in the future, half of respondents
said they would buy ETFs that are cross listed on the Shanghai Stock Exchange. Meanwhile, 40% said they would buy Hong
Kong ETFs through the Stock Connect program. Without clear requirements currently in place, investors seem to have a small
preference for the MRF program, but cross listing will potentially bring added complexity and cost to ETF issuers dependent on
how the Mainland listing is facilitated. Regardless of the channel, the market is waiting for regulators to address the operational
aspects of this cross-border program prior to the implementation.

If you have the option to purchase Hong Kong listed ETFs in the future, which channel would
you prefer for your investment?

No current interest in buying Hong Kong listed ETFs 2% Mainland China

Buy ETFs that are cross listed on Shenzhen Stock Exchange 8%

through Mutual Recognition of Funds

Buy ETFs that are cross listed on Shanghai Stock Exchange 50%
through Mutual Recognition of Funds

Buy ETFs through the Stock Connect program 40%

0% 10% 20% 30% 40% 50% 60%

Percent of Respondents

2019 Greater China ETF Investor Survey Results | 13

Hong Kong and Asia Pacific equity ETFs could be in demand
If a program providing Mainland investors with access to Hong Kong ETFs launched, 63% of investors would be interested
in Hong Kong and Asia Pacific equity ETFs. This remains consistent with the 2018 results, where 65% of Mainland investors
preferred Asia Pacific equity, followed by 60% who were interested in Hong Kong equity ETFs. It is still not clear which asset
classes would be eligible through this type of mutual market access program, but the regional investment focus
of Mainland investors appears clear from the responses.

If included in the Stock Connect or MRF programs, what type of Hong Kong ETF exposure
could be in demand for your clients and your firm? (Select all that apply)

70%

63% 63% Mainland China

60%

50%

43%
Percent of Respondents

40%
40% 38%

33%

30%

23%
20%
20%

10%
10%

0%
Hong Kong Asia Pacific US Equity High Yield Emerging Investment European Commodity Commodity
Equity Equity Fixed Market Grade Fixed Equity Metal Other
Income Equity Income

14 |
Active and Smart Beta
Smart beta demand remains strong
While smart beta and active ETFs represent just 17%7 of the broader global ETF market, their relevance has increased significantly
in recent years. Broken out by region, 97% of respondents in Greater China have at least one smart beta ETF in their portfolio. That
number is 94% in Europe and 92% in the US.

What share of smart beta products currently make up your AUM?

0%
Mainland China Hong Kong Taiwan Total
Do not use 4%
5%
3%

12%
> 20% 0%
0%
5%
Share of Smart Beta

35%
11-20% 38%
35%
36%

43%
6-10% 48%
40%
44%

10%
> 5% 10%
20%
12%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Percent of Respondents

38% of respondents across Greater China expect to increase their exposure to smart beta products in the next year. This demand is
led by investors from Taiwan and the Mainland where 45% and 40% of respondents, respectively, expect to increase allocations to
smart beta this year.

Do you expect your exposure to smart beta ETFs to increase, decrease or stay the same over
the next 12 months?

Mainland China 40% 5% 55%

Increase
Hong Kong 33% 25% 42%
Decrease
Taiwan 45% 15% 40% Stay the same
Total 38% 15% 47%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

7
Morningstar

2019 Greater China ETF Investor Survey Results | 15

Smart beta ETFs are catching assets from mutual funds
Smart beta is often cited as the middle ground in the active-to-passive spectrum. It appears that investors view smart beta ETFs as
vehicles that could combine certain benefits of traditional active management, when compared with passive core index ETFs, and
lower costs.

In fact, 38% of Greater China respondents purchased a smart beta ETF in the last 12 months to replace an actively-managed mutual
fund. Taiwan investors are leading the way as 65% of respondents have reallocated investment from active mutual funds to smart
beta ETFs in the past year.

In Mainland China, a market historically dominated by active mutual funds, the ongoing regulatory reforms focusing on deleveraging
the financial markets and reallocating investment from wealth management products into more transparent collective investment
vehicles, should be a tailwind increasing the use of ETFs, including smart beta.

If you purchased a smart beta ETF in the last 12 months, what did it replace in your portfolio?

5%
7% Mainland China Hong Kong Taiwan Total
I did not purchase smart beta
10%
7%

22%
Allocated new investment dollars 12%
10%
16%

20%
Index mutual funds 33%
10%
23%

40%
An actively-managed mutual fund 23%
65%
38%

13%
Core index exposure 25%
5%
16%

0% 10% 20% 30% 40% 50% 60% 70%

16 |
Equity asset classes draw most active ETF attention
More than 50% of global respondents would look for an actively-managed ETF in equity asset classes. If and when investors in
Greater China have the opportunity to access active ETFs in their local market, equity strategies are expected to be the top choice.
In the Mainland, domestic equity was the top response (42%), while global equity (42%) was favored in Taiwan. Hong Kong
investors showed a slight preference for global equity (32%) over domestic equity (26%).

In a region where fund distribution continues to be dominated by the bank channels and incentivized by commissions, issuers of
active ETFs will need to balance existing intermediary distribution relationships and the potential for their active strategies to be sold
on exchange at a potentially lower cost.

In what asset class would you be most likley to look for an actively-managed ETF?

Mainland China Hong Kong Taiwan Greater China Total Global Total

45%

42% 42%

40%

35%
33% 33%
32%
31%
30% 29%
Percent of Respondents

26%
25% 25%
25%

21%
20%

17%
16% 16%
15%
15%
13%
12%
11%
10%
10%
8% 8% 8% 8% 8%

5%
5% 4%

2%

0% 0% 0% 0%
Fixed Domestic Global Asset Commodities Currency
Income Equity Equity Allocation

2019 Greater China ETF Investor Survey Results | 17

ETFs and Market Exposure
Investors seek fixed income ETFs in volatile markets
During periods of heightened market volatility, respondents across Greater China said they will buy fixed income ETFs (59%) and
low volatility smart beta ETFs (46%).

Although intraday liquidity is often a selling point for ETFs, it’s not the main reason investors are buying them. It appears access
– especially to asset classes such as fixed income, or nuanced strategies such as low volatility – is compelling many to use ETFs
opportunistically.

How will you use ETFs in your portfolio during a period of heightened market volatility?
(Select all that apply)

Mainland China Hong Kong Taiwan Total

0%
Take no action 5%
0%
2%
20%
5%
Buy additional shares of your
5%
current ETF selection 11%
43%
20%
Buy leveraged/inverse ETFs
20%
29%
60%
Buy low volatility smart beta ETFs 30%
50%
46%
58%
Buy fixed income ETFs 63%
55%
59%
28%
Reduce ETF positions 28%
25%
27%
28%
Trade ETFs intraday to take advantage 13%
of market opportunities 15%
19%

0% 10% 20% 30% 40% 50% 60% 70%

Percent of Respondents

18 |
Investors prefer stocks over ETFs for sector exposure
Sector exposure is often seen as a smaller segment of portfolio construction, one that appears many investors prefer to achieve
through individual stocks. However, 30% of investors (the second most) achieve sector exposure through ETFs, underlying
investors’ belief in the power of ETFs in achieving that goal. Taiwan investors took a more balance approach providing equal
weighting (40%) to using sector specific ETFs and buying sector specific stocks.

Which is your preferred method for achieving exposure to a specific sector for your portfolio?

Mainland China Hong Kong Taiwan Total

10%
Buy a sector-specific mutual fund 5%
5%
7%

30%
Buy a sector-specific ETF 25%
40%
30%

50%
Buy shares of the best performing 50%
company in a sector 40%
48%

10%
Buy shares in a handful of 20%
different companies in a sector 15%
15%

0% 10% 20% 30% 40% 50% 60%

Percent of Respondents

2019 Greater China ETF Investor Survey Results | 19

20 |
 Potential Headwinds for ETFs
Access and trading cost are the main challenges
31% of respondents in Greater China stated that the platforms they use make ETF trading difficult or expensive. While platform
issues could be a potential headwind in further ETF adoption, the results highlight how much opportunity exists for global
intermediaries to continue to improve the user experience and make trading ETFs more cost effective.

What are the concerns about ETFs that keep you from increasing you exposure more than you
have already? (Select all that apply)

Mainland China Hong Kong Taiwan Total

0%
Other 3%
10%
3%
15%
Negative press/media coverage 13%
5%
12%
30%
Spreads are too wide and uncertain 25%
35%
29%
8%
I don’t feel I fully understand ETFs 10%
0%
7%
30%
My platform doesn’t make trading 30%
ETFs easy/economical 35%
31%
18%
I don’t need intraday liquidity 20%
5%
16%
20%
I don’t know how to pick the best ETF 13%
15%
16%
25%
None, I don’t have any concerns about ETFs 25%
25%
25%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Percent of Respondents

2019 Greater China ETF Investor Survey Results | 21

Liquidity of fixed income ETFs is a concern
Regarding fixed income ETFs, liquidity and tracking error are the main concerns for investors in Greater China. Liquidity was the top
response for Mainland investors (45%), potentially highlighting the liquidity challenges resulting from corporate bond defaults in the
China bond market. Meanwhile, trading volume was the most important concern for Hong Kong respondents (28%), which aligns
with responses from US and European investors.

What concerns you most when investing in fixed income ETFs?

Mainland China Hong Kong Taiwan Total

45%
45%

40%

35%
35% 34%
Percent of Respondents

30%
30% 28%

25% 25%
25% 23% 23%
20%20%
20% 18%
17%
15%
15%

10% 10%
10%
7%
5%6%
5% 4%

0%
I don’t invest Expense Trading Tracking Liquidity of
in fixed ratio volume error underlying
income ETFs bonds

ETF education efforts are paying off in Greater China

In Greater China, the number of respondents who selected “I don’t feel I fully understand ETFs” and “I don’t know how to
pick the best ETF” dropped sharply from last year. Whether through asset managers, the media, or the broader ecosystem, it
appears investors are becoming more knowledgeable and comfortable with ETFs, demonstrated by the regional ETF market
growth and maturity.

I don’t feel I fully I don’t know how to

understand ETFs pick the best ETF

2018 11% 30%

2019 7% 16%

22 |
Looking Ahead
Last year, in our inaugural Greater China ETF Investor survey, growth was a theme that hinted at a bright
future for ETF product development across the three markets of Mainland China, Hong Kong, and Taiwan.
Despite 2018’s market volatility, ETF AUM for these three markets grew 18%, from $92 billion to $108
billion.8 This year’s results tell a similar story: The Greater China region continues to embrace ETFs and
product innovation will accelerate growth.

Similar to last year, we believe regulatory developments will be a catalyst for further investor adoption
of ETFs. In Mainland China, the regulatory landscape is evolving with a clear focus on deleveraging and
strengthening the asset management industry. The development of the third-pillar pension scheme is a
key factor to watch, as ETFs and other passive products may become important building blocks for target
date funds. In Hong Kong, the new designated specialist program was implemented late last year and
should encourage additional market makers to be active in Hong Kong. Issuers are also optimistic about
the flexibility that the listed/unlisted share class can bring as they look to scale their ETF platforms. Finally,
in Taiwan, insurers have been an important part of the growth in fixed income ETFs as they have looked
to offshore investments to find higher yields. ETF feeder funds head the regulatory agenda in Taiwan this
year, and issuers are optimistic about the opportunity to expand the use of ETFs through these funds,
once approved by the regulator.

However, the regional outlook still presents challenges. A key obstacle continues to be the commission-
based distribution platforms that are prevalent in the region but do not align with a structural benefit of
the ETF wrapper (i.e. low cost). Enhanced disclosure requirements have increased the transparency of
these fee arrangements and could drive investors into lower cost products over time, but for now it is a
large barrier for widespread ETF adoption by retail investors.

With that said, wealth generated in Asia (especially Mainland China) is growing at an unprecedented
pace. Wealth generated by high net worth individuals in Asia is expected to double from $21.6 trillion
in 2017 to $42 trillion by 2025.8 Mainland investors are also looking for opportunities to diversify their
investments, which has been amplified with the recent volatility in the onshore capital markets. ETFs are
well positioned to be a key product for capturing the increasing wealth and offshore demand.

Regional issuers have been eagerly awaiting a cross-border program to add another channel, outside
of Qualified Domestic Institutional Investor (QDII), for Mainland investors to access global investments.
The current options regulators and exchanges are evaluating include adding ETFs to the Stock Connect
program that connects the Shanghai, Shenzhen, and Hong Kong exchanges or through a potential cross
listing scheme leveraging the MRF infrastructure. The benefits and potential challenges of these options
are well documented, but there is an expectation that a cross-border ETF program between the Mainland
and Hong Kong will progress in 2019.

As highlighted in the survey responses, we expect the tailwinds of increasing ETF adoption, regulatory
change, and product innovation to accelerate growth in the Greater China ETF market this year. As a
result, Greater China will be a focal point for ETF issuers as they look to position themselves to capture
this increasing demand in 2019 and the years to come.

8
Bloomberg

2019 Greater China ETF Investor Survey Results | 23

If you would like to discuss the survey or learn more about ETFs, please let us know.
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