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Financial markets may have plummeted in most parts of the world in 2022, but a handful of countries are on track to post growth in exchange-traded fund assets despite headwinds from falling valuations.
The resilience confirms the increasing adoption of ETFs around the world – particularly in some emerging markets where adoption has lagged behind developed markets – as well as some pockets of resistance within the financial markets themselves.
According to data from Morningstar Direct, as of late November, Chile, India, Mexico and (just) South Korea were on track to post annual ETF asset growth, even as global ETF assets fell 7.6 percent from $10.3 tn through $9.5 trillion, according to ETFGI, a consulting firm.
In some cases, the declines were even greater. Assets of ETFs listed in Sweden fell 36.3 percent to $6.3 billion in the first 11 months of 2022, according to Morningstar.
Colombia’s ETF market slipped 31 percent to $1.4 billion as net inflows exacerbated a 12.4 percent equity market decline in dollar terms, while tiny Indonesia’s market slipped another 26.7 percent to 358 on net outflows million US dollars could shrink – despite a stock market increase of 9.1 percent.
Among the larger markets, US-listed ETF assets fell 6.4 percent to $6.8 trillion, Irish-listed vehicles fell 7.7 percent to $964 billion, and Japan fell 17 percent, according to Morningstar. 9 percent to $446 billion. ETFs listed in Luxembourg are down 16.7 percent to $281 billion and Canada is down 7.1 percent to $254 billion.
However, there have been pockets of growth for the industry, perhaps most notably in India, where ETF assets are up 11.4 percent this year to $60.6 billion, despite the stock market posting modest losses in dollar terms.
“India is seeing tremendous growth in index products, both ETFs and mutual funds,” said Deborah Fuhr, Managing Partner and Founder of ETFGI. “There really has been an awakening in the growth of index products tracking the Nifty 50 [equity] Index.”
Kenneth Lamont, senior fund analyst for passive strategies at Morningstar, said India is one of the “more interesting” growth stories of the ETF industry, with at least 15 ETFs, both equity and fixed income, generating $100,000 or more in net inflows so far this year have received .
“We’re late in the race but we’re catching up,” said an official at NSE Indices, a subsidiary of the National Stock Exchange of India. “The index fund concept is very popular and growing in India.”
The country’s ETF assets have quintupled since December 2017, when it was just $12.2 billion, the second-highest growth rate in the world, behind only Chile, according to Morningstar.
The official dated the start of the industry’s growth spurt to 2015, when total assets in stock and bond ETFs were a “tiny” $1 billion, although India’s first ETF was launched in 2001.
This year, the Employees’ Provident Fund Organization, which manages India’s mandatory pension fund, began pumping 5 percent of additional investment into stock ETFs that track the Nifty 50 and Sensex 30 indices. This was later tripled to 15 percent.
“That was the driving force behind the launch of the ETF industry,” the official said. “Once they started investing, the industry skyrocketed and retail investors started investing in passive funds as well.”
India now has 294 passive funds, up from just 84 in March 2017, according to Association of Mutual Funds in India data compiled by NSE Indices, with the segment now accounting for about 15 percent of the fund industry’s total assets.
About 16.3 million investor “folios” now include ETFs and 3.1 million passive mutual funds, up from 1.3 million and 0.3 million respectively in March 2019, according to AMFI data compiled by the exchange.
“Most active funds, particularly in the large-cap category, are finding it difficult to outperform the underlying indices, so people are switching from active to passive funds,” the official said.
The other big success stories come from parts of Latin America. Chile has had the strongest asset growth of any country tracked by Morningstar this year, with assets under management up 21 percent to $4.1 billion.
Net inflows came in at a solid $919 million, the second-highest on record, though only a fraction of 2021’s $3.2 billion, while a 22-percent rise in the dollar-denominated MSCI Chile Index .4 percent will have helped those investing in the domestic stock market.
Mexico is another bright spot, with a combination of net inflows and more modest stock market gains helping to lift wealth by 8.2 percent to $6.1 billion.
Lamont noted that these markets remained small and, in the case of Chile, most inflows were absorbed by just one fund, Singular Global Corporates, which invests in dollar-denominated debt issued globally.
However, the data, based on each ETF’s primary listing, may not capture the full dynamics of Latin American markets, Lamont said, since many now allow ETFs whose primary listing is overseas to be cross-listed.
Hector McNeil, co-founder and chief executive of HANetf, which has listed more than 20 ETFs in Mexico among others in Chile and Peru, said there was “huge demand” for foreign assets, such as US Treasuries hedged into Mexican pesos to limit the risk.
In addition, McNeil said that European-listed ETFs based on the continental UCITS fund structure are more tax efficient than the two US-listed ETFs, which typically charge a withholding tax, and even than direct holdings in Mexican bonds.
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