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Global ETF balance, Up to $10 trillion, Flexible trading even during sudden market changes

THE NIKKEI via scoutAsia

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August 14, 2023 2 min read
Global ETF balance, Up to $10 trillion, Flexible trading even during sudden market changes

Money is heading to exchange-traded funds (ETFs) around the world. The balance under management reached a record high of $10.51 trillion (approximately 1.5 quadrillion yen) as of the end of June. Price movements in financial assets have been intensified by global interest rate hikes and deteriorating U.S.-China relations. This has led to the expansion of trading in ETFs, which have low management costs and are easy to buy and sell even in the event of sudden market fluctuations.

According to ETFGI, a British research firm, global ETF inflows in January-June were $370 billion, the second largest for the first half of the year after 2021 and 2012. In particular, June saw $103 billion inflows, 2.2 times the amount of the same month last year, due to the global rise in stock prices.

Like individual stocks, ETFs listed on exchanges move in price in real time and can be traded at any time during trading hours. Investors can respond immediately even when the market moves significantly. Since unlisted investment trusts typically update their prices once per day, it is difficult to be agile.

Compared to unlisted investment trusts, ETFs also feature lower fees. For example, “active-type” publicly offered domestic investment trusts, in which professionals select and invest in individual stocks, charge a fee (trust fee) of about 1% to 2% per year, depending on the balance of purchases. In contrast, ETFs linked to the MSCI All-Country World Index (ACWI) listed on the Tokyo Stock Exchange account for less than 0.1%.

“Index-type” ETFs, which are linked to the price movements of indices such as the Nikkei 225, account for 90% of the world’s outstanding ETFs. Investment targets are easy to understand and fees are generally lower than those of active types. The ETF with the highest inflows in June was the passive “Vanguard S&P 500,” which tracks the US S&P 500 Stock Index, with $11 billion in inflows. It was the largest inflow ever for an individual ETF, according to ETFGI.

Inflows into active ETFs have also increased. One reason is the growing interest in professional investment management amid market turbulence. At the end of June, the balance under management was a record $583 billion, a five-fold increase since 2018. This exceeds the pace of increase (2x) for all ETFs over the same period.

According to a survey by the Investment Trusts Association, the total net assets of ETFs listed in Japan more than doubled over the past five years to 72 trillion yen at the end of June. Nikko Asset Management’s Yukihide Imai, senior adviser, ETF Center, points out, “In addition to individuals, institutional investors such as pension funds and banks are increasingly using ETFs because of their cost.”

On June 29, Japan Exchange Group (JPX) announced the cancellation of its ban on active ETF listings. Trading is expected to begin this fall. There is hope that new products for the new Nippon Individual Savings Account (NISA), which will be launched in 2024, will give individual investors more options.