Asian institutional investors ramp up ETF use

Scientific Beta
  • Asian institutional Investors massively increased their use of ETFs in 2018
  • Their main interest is in fixed income and smart beta ETFs
  • They tend to trade ETFs more tactically than buy and hold retail investors

Asian institutional investors almost doubled their ETF allocation in 2018 to as much as 23% of total assets as regional asset owners are more eager to use fixed-income and smart-beta ETFs for portfolio diversification.

According to a survey from BlackRock and US financial consultant Greenwich Associates, Asian institutional investors increased their use in ETF for short term in response to rapid market fluctuation and a spike in volatility last year.

BlackRock and Greenwich Associates conducted the survey by interviewing 51 Asian institutions including institutional funds and insurance companies. 40 of which are ETF investors and 11 are non-users.

According to the findings, adoption of ETFs as tactical portfolio adjustment grew to 63% up from 51% in 2017, while almost half the respondents currently investing in ETF expect to increase their allocations further this year.

There have been a clear trend of institutional investors adopting ETFs as they seek to diversify their portfolios, Geir Espeskog, head of iShares distribution for BlackRock Asia Pacific, says in the report.

Asia’s institutional investors are embracing multiple ETF applications, enabling core asset allocation, tactical as well as strategic approach to investing across asset classes.

“This trend is particularly noteworthy, given increased use of ETF by pension, insurance and asset managers throughout the region. At a time of volatility, we are seeing expansion in both the breadth and depth of fixed-income ETF adoption by client portfolios,” Mr. Espeskog points out.

Meanwhile, Asian institutional investors’ allocation to fixed-income ETFs saw a significant increase to 26%, compared to 17% in 2017 and 6.6% in 2016. Liquidity, quick access and low management fees are the major reasons for Asian institutional investors to increase their allocation to fixed income ETFs.

According to Frederick Chu, head of ETF at ChinaAMC (Hong Kong), Asian institutional investors are more interested in utilising bond ETF for diversifying into China sovereign debt.

As regional institutional investors allocates to China equities and fixed income, they still incline to use broad-based market cap indices. For example, the company’s Bloomberg Barclays China Treasury + Policy Bank Bond Index ETF has closed several transaction with large global life insurance companies with strong presence in Asia Pacific, Mr. Chu adds.

Apart from cost and liquidity benefit, fixed income ETF have been commonly adopted by Taiwanese insurers to get away with the regulatory constraint on overseas investments. However, the island’s financial regulator is expressing concern over the issue that aggressive allocation to fixed income ETTs may lead to a high currency risk exposure for insurers.

Smart-beta

BlackRock also finds that a growing appetite for factor-based investment strategies has emerged as an important source of institutional ETF demand in Asia.

Minimum volatility and dividend/equity income ETFs are the most popular smart beta products used by Asian institutional investors. Efforts among ETF providers to educate investors and recent market volatility are cited as reasons for the increase in smart-beta strategies, according to the survey.

As well, economic growth in China is another important factor that creates demand for ETF among institutional investors.

With the increasing representation of China in global indexes, Mr. Espeskog anticipates rising demand for products that facilitate broader investor engagement with China’s onshore capital markets.

“ETFs are the ideal tools to provide investors with liquidity, diversification and ease of access to the world’s second largest capital market,” he adds.

According to the survey, the vast majority of the respondents investing in China consider single-country ETF as the preferred vehicle to gain exposure to China market, while only 19% and 24% of US and European respondents respectively are approaching Chinese exposure via ETFs.

The ascending trend of China ETF adoption is highlighted by the fact that the net inflows into Hong Kong-listed A-share market ETFs have been accelerating over the few months.

For example, the ETFs registered HK$2.3 billion (US$294 million) inflows last October. The amount was close to the accumulated net flows the ETFs garnered in the previous three months, according to figures from US financial service firm Brown Brothers Harriman.

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