Asian bond ETF market to grow despite rising interest rates

Institutional investors to drive demand for fixed income ETFs

RISING interest rates are making it more challenging for investors to navigate the bond market. But for investors wanting to retain their exposure to bonds, investing in fixed income exchange traded funds (ETFs) is an option.

Asset managers expect demand for bond ETFs to remain solid this year as investors continue to diversify portfolios. In fact, institutional investors are allocating to fixed income ETFs in order to enhance the overall liquidity structure of their portfolios.

“We’re seeing that evolution of growth from different segments of the market around trying to access fixed income liquidity in what has become an increasingly difficult environment for clients to navigate,” says Sean Cunningham, head of capital markets and fixed income for iShares, Asia-Pacific. ETFs are traditionally considered more liquid than other instruments, luring investments from institutions.

In 2016, iShares gained more than US$7 billion worth of inflows into their fixed income ETFs from Asia-Pacific clients, a trend that continued into 2017.

“It was a record year in 2016, and 2017 continued to be a strong year as well,” Cunningham says. He notes that smaller financial institutions are also turning to ETFs to boost exposure to the bond market that is becoming increasingly expensive to access directly.

“In a world where there is less balance sheet from banks, the smaller players are finding it harder to access fixed income markets and are probably not receiving the same level of brokerage and the same level of service from large investment banks than they were before the global financial crisis,” he says.

He adds that fixed income ETFs can fill that gap and provide smaller clients with the ability to access fixed income markets. Investors can rotate within those markets as well. “If they’re looking to change exposures within the fixed income space because of a certain market environment, ETFs allow them to quite easily move from one exposure to another exposure that would suit their investment needs,” Cunningham says.

“We haven’t necessarily seen a drop in the usage of fixed income ETFs, which is obviously very encouraging. We still think there’s a lot of way to go in terms of driving assets into these products, as they are able to offer the ability to more easily access markets, not only for smaller clients but also for larger institutions,” Cunningham says.

In a way, the golden era of fixed income ETFs actually took place in 2016 when benign interest rates, in part, resulted in huge inflows into these products. At that time, inflows into fixed income ETFs equaled 50% of the inflows into equity ETFs, which traditionally dominated the ETF market. Since then inflows into fixed income ETFs have never approximated those volumes.

In 2017, fixed income ETFs continued to grow amid flows into the overall sector. The trend continued into 2018 with assets invested in Asia-Pacific ex-Japan ETFs increasing by 8.25% in January to US$14 billion, according to data from ETFGI.


This article is an abridged version of Asian Bond ETF market to grow despite rising interest rates published in the March 2018 print edition of The Asset, to be made available on The Asset Plus.


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12 Apr 2018

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