With 99 exchange-traded funds (ETFs) listed on its market, the Tokyo Stock Exchange (TSE) is on the brink of achieving its goal of having 100 ETFs by 31 March 2011. Yet the Japanese ETF market remains largely retail-focused and the exchange is keen to increase institutional usage, says Yasuyuki Konuma, the TSE listing department's director of business development.
“It is the TSE's responsibility to widen the choice of investment tools so that Japanese retail investors will have opportunities to invest in many other asset classes besides Japanese equity. But we also need to increase Japanese institutional investments in ETFs,” Konuma says.
Since the introduction of the TSE's ETF market in July 2001, trading has been dominated by retail investors, and to a much lesser extent, foreign asset managers. The latest two ETFs to be approved by the TSE are the Listed Index Fund World Equity (MSCI ACWI) ex-Japan and the Listed Index Fund Australian REIT (S&P/ASX200 A-REIT), which will be listed on March 8 and March 9, respectively. Both ETFs are managed by Nikko Asset Management.
“In the US market, ETF trading accounts for 20-30% of the whole transaction volume of the exchange with active participation by both retail and institutional investors. On the TSE, it's small, something like 1%. Activity on the TSE is heavily based on Japanese equities in terms of trading value. We would like to increase trading of the ETFs. We need more involvement by the Japanese institutions,” Konuma says.
According to Konuma, smaller Japanese institutional investors, in particular, will benefit from investing in ETFs to gain access to different asset classes and overseas markets that would otherwise be difficult and costly for them to get exposure to. “For the smaller pension funds and regional banks, ETFs are easier to handle. For example, if they like to have a portfolio of emerging countries, they would have to execute their trading position across many countries. But with ETFs, its much easier because they can just execute their trading position via the MSCI Emerging, for instance,” Konuma says, adding that a growing ETF market is part of a wider strategy to “expand the products listed on the exchange”.
To draw the interest of institutional investors, the TSE is engaging in initiatives to make information on ETFs more readily available and increase ETF liquidity as well as educate investors on the benefits of investing in ETFs. From March 2011, the TSE will begin calculating and publishing real-time indicative net asset value per share for ETFs.
The further expansion of the TSE's ETF market will be driven by efforts to increase the number of listed ETFs and trading volume, expanding the investor base and product range, as well as encouraging the dual-listing of ETFs on other exchanges. For this purpose, the TSE has forged strategic alliances with the NYSE Euronext, London Stock Exchange, Korea Exchange and the Hong Kong Stock Exchange. The TSE has also proposed a new regulation on the listing of exchange-traded notes (ETNs), which is currently under public consultation. A number of investment banks are expected to list ETNs on TSE once the consultation period concludes in the next two to three months. An ETN is an unsecured debt security guaranteed by its issuer, usually an investment bank, that tracks the value of an asset or index.
“We very much welcome dual listings of ETFs. One of the best products on the TSE is the Gold Shares, for which the main market is the NYSE but it is dual-listed on the TSE and has very good trading volume here. We would like to increase those dual-listing initiatives.”