Asia lacks deep, mature bond markets relative to Europe and the US, particularly in terms of corporate issuance, and the small number and volumes of fixed-income exchange-traded funds in the region reflects that.
But that is likely to change as Asian corporates increasingly make use of bonds for funding themselves, says Russ Koesterich, chief investment strategist at BlackRock's iShares unit, the world's biggest ETF provider by assets.
“The development of the fixed-income ETF market will obviously parallel the underlying development of the Asia fixed-income markets,” he told AsianInvestor while in Hong Kong recently. “And as you see more bond issuance taking market share away from the bank loan market, that will certainly facilitate a broader and deeper offering of fixed-income-related ETFs.”
Having easy-to-trade instruments to access bonds helps the underlying markets develop, says San Francisco-based Koesterich. A similar thing happened with gold and commodities, he notes, with the availability of liquid, transparent instruments boosting interest in those asset classes.
Fixed-income exchange-traded products (which include ETFs) expanded at the fastest rate of all ETP types globally last year, with a 24% year-on-year rise of $50.6 billion to $258 billion, driven almost entirely by cash inflows of $49.8 billion, according to BlackRock. That net inflow surpassed the 2010 figure of $40 billion collected in 2010 and was largely driven by US-listed products.
Rising demand from investors worldwide for both high-yield and investment-grade emerging-market bonds will presumably provide a strong motivation for increased issuance. Koesterich points to strong interest in such instruments particularly among investors in Asia. “It’s a very hot topic.” he says. “The big question is whether to go for dollar-denominated or local-currency instruments.”
ETFs can be a convenient way of accessing EM bonds, adds Koesterich, because often the ETFs may be more liquid than the underlying bonds. And in less liquid Asian bond markets, issuing ETFs may help improve liquidity, since bid/offer spreads may well be a lot tighter on the ETFs than on the underlying bonds.
However, some are sceptical about the extent to which passive bond funds will really take off. For one thing, it is more difficult to create and maintain these products than equity ETFs, argues Lim Heong-Chye, chief investment officer at APS Komaba Asset Management, a fixed-income manager based in Singapore. Moreover, passive bond products tend not to provide returns to rival those of ETFs based on other asset classes, he has told AsianInvestor in the past.
Another obstacle seems to be that governments in the region are in no rush to see bond markets develop. The development of domestic bond markets in Asia has lagged the rest of the world and that of equity and foreign exchange markets in the region. And there's little sign of things changing on that front, says Bunt Ghosh, Asia vice-chairman of fixed income for Credit Suisse and head of emerging-market risk for the bank's asset management business.