Asia’s institutional investors are increasingly using exchange-traded funds (ETFs) to diversify into global markets, according to a survey released on Wednesday by Greenwich Associates (GA) and commissioned by BlackRock.
Fifty-four percent of survey participants said they had used ETFs for international diversification purposes in 2017, up from 34% in 2016, signalling a more strategic approach to these products and displacing tactical adjustments as the top reason for using ETFs.
The survey covered 50 institutional investors across Asia between October 2017 and January 2018.
Rising overseas investment is increasingly visible across an array of institutions in the region, especially income-starved Japanese investors, Geir Espeskog, head of iShares distribution for Asia-Pacific at BlackRock, said.
“Clearly, yield is a big motivator and institutions are finding it in assets such as US investment grade bonds,” he told AsianInvestor.
Institutions with a traditionally strong home investment bias were opting for ETFs when venturing into overseas markets they might have little knowledge of, he added.
A Willis Towers Watson study released in February showed Asian pension funds are increasingly turning to overseas investments and alternatives to boost returns, AsianInvestor reported. Not all of them will use ETFs to boost global market exposure, but ETFs are likely to account for some portion of that exposure.
The GA survey showed a notable increase in the popularity of fixed-income ETFs, with the proportion of Asian institutions using them rising to 44% in 2017 from 32% two years ago.
ETFs accounted for 17.1% of fixed income assets held by Asian investors in 2017, up from 6.6% in 2016, and came at the expense of individual bonds, which made up nearly 59% of fixed-income assets in 2016 but only about 50% in 2017, the survey noted.
The proportion of study participants using individual bonds to obtain fixed-income exposure also declined to about two-thirds from approximately three-quarters the prior year, it said.
In some instances, investors have been paring domestic holdings to make way for fixed-income ETFs, Espeskog said. “In some instances, funding has come from active mandates.”
Asian institutions use fixed-income ETFs primarily for international fixed-income exposures, most commonly for government bonds and investment-grade credits.
Forty four percent of existing users expect to increase their fixed income ETF allocations in 2018. One-third of those institutions plan to boost allocations by more than 10%, while two-thirds plan to increase allocations by 5% to 10%.
While it’s still a small base, growth has been very rapid for fixed-income ETFs, Espeskog said. “We received $3.8 billion in fixed income ETF flows from Asia-based clients in 2017; by April 2018, we are already at $2.5 billion,” he said.
Growing appetite for fixed income ETFs was underlined by a separate survey by Brown Brothers Harriman and research firm New Narrative that was also released today.
The survey -- focused on ETF trends in China, Hong Kong and Taiwan -- noted that 79% of all respondents were invested in fixed income ETF products compared to other ETF asset classes, despite the greater range of equity products in these markets. That's compared to 62% who invest in equity ETF products.
“More investors are finding that it is more cost-effective to access fixed income exposure by using ETFs than trading in individual bonds, as well as easier.
“The [bid-ask] spread on individual bonds is frequently wider than the spreads on liquid ETFs on a standalone basis,” Chris Pigott, head of Hong Kong ETF services, Brown Brothers Harriman, told AsianInvestor.
The BBH-New Narrative survey covered 100 professional investors, including independent advisers, institutional investors, discretionary fund managers, and other investors affiliated with a retail or private bank.
The GA survey also noted that factor-based investment strategies are expected to boost ETF demand.
About 47% of survey respondents indicated they had invested in non-market cap weighted/smart beta ETFs, up from 44% in 2016. Some 70% of these investors said they planned to increase allocations to these funds this year, it added.
In addition, active ETFs look set to gain more appeal with Asian investors, amid a fast-growing overall market for index-linked products, AsianInvestor reported in January.
Active ETFs have a manager making decision on the underlying portfolio allocation and as such do not adhere to a purely passive investment strategy.
The BBH-New Narrative survey noted that 30% of Hong Kong investors are keen to access to active ETFs, suggesting the potential for future growth if the Securities and Futures Commission allows them.
Globally, ETFs/exchange-traded products had amassed assets totalling $4.9 trillion by the end of March, according to London-based consultancy ETFGI.
The phenomenal rise of ETFs over the years has raised concerns among some prominent investment experts. In a LinkedIn post on May 1, veteran emerging markets investor Mark Mobius warned about the risks of passive investing, noting that intra-day liquidity for ETFs can be challenged during market downturns and that algorithmic trading has exacerbated this risk.
Last August, Bryan Goh, chief investment officer for Singapore at Swiss private bank Bordier, warned ETFs posed a systemic risk to financial markets.
However, Jerome Powell, chairman of the Federal Reserve, has played down the idea heard in some quarters that ETFs contributed to the market decline seen in early February.