Industry Updates

Life insurers drive Taiwan's fixed income explosion

Felix Xu

a city with tall buildings and a body of water in the background

Taiwan’s bond ETFs continue to boom, with the sector seeing more inflows in H1 than in all of 2018.

The momentum feeding the market is coming largely from institutional investors seeking to tilt away from equities.

The island’s fixed income ETFs registered year-to-date net inflows of US$14.8 billion through June this year, accounting for 12% globally fixed income ETF inflows during the time, according to figures from Bloomberg.

It represents an increase of 35% from the net flows of US$11 billion for the fixed income ETF market last year during which the market experienced a phenomenal growth of 900% to reach NT$400 billion (US$12.9 billion) in total AUM as of December 2018.

The AUM gain was primarily driven by local insurance capital as many individual life insurers fully subscribed single fixed income ETFs during their initial public offerings (IPOs).

In view of the concentration and liquidity risk, the Financial Supervisory Commission (FSC) launched new measure earlier this year, which caps the investment by a single investor in an ETF IPO at no more than 50% and the shares are required to come down to 30% in six months.

The clampdown is unlikely to dampen the growth with the consistent market demand. It will rather boost institutional investors to diversify their investments in the ETFs, which will make the market healthier over the long run, according to a Taiwan ETF manager.

“Some insurance companies may use fixed income ETF to get away with the mandatory 45% allocation limit in overseas assets, but, overall, the ETFs still look attractive from the return perspective especially for those tracking US fixed income. It’s partly because of that the yield of Taiwan government bond is much lower than US Treasuries,” the manager says.

From the new supply standpoint, ETF providers are still very keen to launch fixed income products as bonds are able to generate relatively stable returns under the global volatile stock market.

Some 47 of the 77 newly launched fund in the first five months this year were international ETFs. Of these, some 20 were fixed income ETFs, and three were high yield bonds, according to figures from Taipei-based fund consultancy Keystone Intelligence.

Also, there are 17 international fixed income ETFs in the pipeline for the remaining seven months.

The new supply includes an ETF umbrella fund launched by CTBC Investments schedules. The fund, which is scheduled for IPO fundraising from July 15, comprises three fixed income ETFs tracking Asian emerging market debts, five-year emerging market government bonds and highly rated US government bonds.

CTBC Investments says the underlying credits are appealing to investors with the current monetary loosening market environment.

Overall, the ongoing product diversification will allow local institutional investors to have more ETF options to customize their fixed income portfolios. Also, some ETF providers are broadening their client base to launch the fixed income products best suited for retail investors’ demand.

Asides from fixed income ETF, exchange-traded notes (ETNs) have been capturing significant flows since nine local securities firms rolled out the first ever ETN products in Taiwan on the island’s over-the-counter market late April.

The first batch of products include the ETNs launched by Fubon Securities, which are benchmarked against TIP Customized Big Apple Total Return Index and TIP Highlight 20 Equal Weight Total Return Index.

According to Fubon Securities, both ETNs reached record high in daily trading volume in early July.

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