Asian institutional appetite for fixed-income ETFs on the up

21 February 2017   Category: News, Asia, Global   By Asia Asset Management

Asian institutions had an average exchange-traded fund (ETF) allocation of 17.6% in 2016, up from 2.1% in 2015, thanks to the increasing popularity of fixed-income ETFs and the broadening usage of ETFs within investor portfolios.

This is according to a survey commissioned by BlackRock, which polled 59 Asian institutions comprising of institutional funds, asset managers and insurers.

Although the levels are still lagging behind the US, which is currently the world’s most active ETF trading market, it is well above the allocations found in other markets including Europe and Canada, which stand at 7.6% and 15.2% respectively.

“The significant surge in ETF allocations reflects Asian institutional investors’ increasing confidence in ETFs for a variety of applications,” says Geir Espeskog, head of ETF and index investment APAC distribution at BlackRock. “Fuelling this year’s growth in Asia has been the take up of fixed-income ETFs.”

With the current usage of bond ETFs by Asian institutions growing to 41% from 32% in 2015, 44% of bond ETF investors plan to increase their allocations to fixed-income ETFs in the coming year, compared to 14% in the previous study, while 25% of investors expect an increase of more than 10% in bond ETF allocations.

“Asian institutions’ appetite for fixed-income ETFs grew at an exponential rate in 2016, reflecting the continued need for international diversification, the hunt for yield and shrinking bank participation in the secondary market,” explains Mr. Espeskog.

Driving the growth in ETFs allocations is the increased use by large Asian asset managers running multi-asset funds, with some asset managers surveyed allocating more than 80% of their total assets to multi-asset ETF funds.

Meanwhile, smart beta is gaining in popularity and is driving product innovation, with 44% of institutional ETF investors adopting non-market-cap weighted/smart beta ETFs in 2016, up from 25% in 2015. The allocation to these funds is expected to increase, as indicated by 54% of institutions investing in smart beta products, which is nearly double the numbers in 2015, according to the BlackRock study.  

“Asian ETF investors now have on average of 6.6% of fixed-income assets in ETFs, far exceeding the proportion that fixed-income ETFs account for in the global fixed-income universe,” Mr. Espeskog points out.

He continues: “With expectations of varied interest-rate hikes globally this year, investors value liquidity and access more than ever. We expect that fixed-income ETFs will continue to be one of the main drivers for ETF growth in the region in 2017, as Asian institutions progress in the use of ETFs.”

Latest figures

At the start of this year, the global ETF industry saw a record level of assets under management (AUM) at US$3.68 trillion as of January 31, 2017; thus breaking the record set in December 2016, according to independent ETF/ETP research and consultancy firm ETFGI.

Geographically, as of the end of January, ETF AUM had reached $2.64 trillion in the US, $598.76 billion in Europe, $132.87 billion in Asia Pacific ex-Japan, and $88.84 billion in Canada.

According to Deborah Fuhr, managing partner and co-founder of ETFGI, “Investors favoured equities over commodities and fixed income during January as equity markets had a good start to 2017. Developed markets outside the US and emerging markets showed strong performance in January up 3.2% and 5.1% respectively while the S&P 500 index was up 1.9% and the DJIA index was up 0.6% in January.”