What happens when a single investor owns half of a single country’s ETF shares? The market tends to listen when you talk.

The Bank of Japan just last week unveiled a new plan to purchase ETFs tracking companies which, as it notes, are “proactively making investment in physical and human capital.” In other words, companies that are making capital spending a priority.

The BOJ is looking to shell out 300 billion yen a year (US$2.5 billion) on this purchasing plan. The idea is to soften the blow as it begins to shed financial institution stocks purchased in the past.

The thing is, these ETFs don’t exist in Japan—for now. While many active managers use capital spending as an input into the investment decision-making process, ETF investors are at the moment limited to factors defined in a growing suite of smart beta products coming to the market. That allows them to focus on things like dividends, volatility, or momentum—but it doesn’t look as closely at capital spending.

This could change, however, particularly as the market seeks to respond to the BOJ’s very clear need.

The big question is what impact this will make on the overall market in Japan. Will there be increased pressure on companies to boost spending—and what effect could that have on share prices for companies that are in a position to spend? It could be construed as market meddling on a pretty large scale. At least that is a suggestion made by one commentator in this Bloomberg article. And when one player is such a significant part of a single market, it could be a recipe for trouble.

Market impact aside, the link between large institutions and ETF providers isn’t new. Back in 2013, the US$31 billion Arizona State Retirement System became the first pension plan to seed new ETFs. They did it in partnership with iShares and the goal was to create three factor-based ETFs to meet its own investment needs.

The BOJ has not yet said whether it plans to work with ETF providers to develop or at least provide input on emerging products to meet its needs, but it’s certainly a possibility.

In the meantime, the direct link between large investors and ETFs continues to develop—and in the case of Japan, it looks like it could reshape the ETF space, if not the entire market, for months and years to come.







Copyright © 2018 Transcontinental Media G.P. Originally published on benefitscanada.com

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