Industry Updates

Taiwan's bond ETF market grew 900% last year, thanks to insurers

Felix Xu

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  • Taiwan's fixed income ETFs grew 900% last year, thanks to life insurance companies

  • The heavy flows are causing Taiwan's regulator to worry about currency risks

Significant flows from cash-rich local insurers boosted Taiwan's fixed income ETFs' total AUM to grow nine times last year to an all-time high of over NT$400 billion (US$12.9 billion), surpassing South Korea as the largest fixed income ETF market in Asia.

Despite the market boom, the island state's financial regulator is worried about the currency risk caused by insurers' aggressive allocation to the ETFs, and is considering curb on the growth.

According to Taipei-based Economic Daily, Taiwan's fixed income ETFs' total assets gained almost 900% last year to top NT$400 billion as of January 21, 2019, equivalent to about 53% of overall ETF market.

Currently, 53 of the total 100 locally registered ETFs in Taiwan are fixed income products.

The robust market was partly fueled by new supply. In 2018, major local ETF providers, including Cathay Securities Investment Trust Co (Cathay SITC). and Fubon Asset Management Co., rolled out a number of new bond ETFs, and many of which are designed to track China's treasuries and policy bank credits, as well as US corporate bonds.

The trend is likely to persist this year as more than 30 new fixed income ETF have been filed to the regulator, Financial Supervisory Commission (FSC), for listing, and the products are expected to come to the market in the first half of the year.

The local newspaper cites Bloomberg's data to estimate that the size of fundraising for each new fixed income ETF is approximately US$300 million. In other words, the new bond ETFs will draw as much as US$9 billion in total from the market in the first half.

Also, the Taiwanese Government is pushing ahead with the development of Formosa bond, foreign-currency bond issued by overseas companies sold in Taiwan.

Yuanta Securities Investment Trust Co., the largest ETF provider in Taiwan, launched the island state's first Formosa bond ETF in 2015. Market expects that more capital will be diverted into Formosa bonds through ETFs, and Formosa ETFs will attract up to US$80 billion by 2020.

Strong institutional demand

From the demand perspective, local life insurers are the major buyers for fixed income ETFs. Almost 75% of Taiwan's bond ETFs are invested by major life insurers such as Skin Kong Life Insurance, Cathay Life, Fubon Life, and Nan Shan Life.

The insurers have reportedly committed a total of NT$300 billion to the ETFs. The ETFs tracking US corporate bonds look particularly attractive to the investors because of the relatively high liquidity and investment return of their underlying assets.

Another reason why ETFs are becoming increasingly popular among Taiwanese insurers is that insures are able get away with the 45% regulatory upper overseas investment limit by using overseas ETFs.

Taiwanese life insurers currently sit on as much as NT$24 trillion of insurance funds, and 10% of which are investable assets. A significant share of their investment portfolios are deposits or cash instruments, so the insurers still have enormous amount of capital to purchase ETFs going forward.

For example, Cathay Life, the largest life insurers in Taiwan with total investable assets of NT$5.75 trillion, previously said it is planning to increase its allocation to fixed income ETFs.

However, the FSC issued a warning late last year that fixed income ETFs have been overinvested by domestic insures. As many fixed income ETFs are denominated in USD, the excessive allocation to the ETFs may result in a high currency risk for the insurers.

As such, the FSC has required local insurers to review the liquidity and structure of the ETFs portfolio. The regulator said it is closely monitoring their capital flows and may take further action to control their ETF investments if the situation does not improve.

However, local ETF managers believe the regulatory concern will not cool off institutional investors' appetite on fixed income ETFs as the products are very effective tool for their tactical asset allocation.

Eddie Cheng, a portfolio manager of Cathay SITC, institutional investors can use fixed income ETFs as a tool to manage yield, risk level, and diversification of their portfolios.

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