Greater China asset owners eye bond ETFs as rate cycle shifts
Fixed income exchange-traded funds (ETFs) are the most in demand among Greater China asset owners as markets brace for an impending rate cut cycle, according to Brown Brothers Harriman's (BBH) latest survey released on Wednesday.
The annual Greater China ETF Survey revealed that fixed income and currency ETFs are in highest demand among asset owners from mainland China, Hong Kong, and Taiwan.
“Some responses are representative of what’s going on in the overall macro environment and the volatility in certain markets,” said Chris Pigott, head of Asia exchange-traded fund services at Brown Brothers Harriman, referring to the anticipated US Federal Reserve interest rate cut next week.
“The overall demand dynamic is more of a fundamental shift we are seeing as investors start to pivot away from traditional mutual funds,” he told AsianInvestor.
The BBH report surveyed 103 ETF investors across Greater China in March, with 59% of respondents managing over $1 billion in assets. Participants included asset owners, financial advisors, fund management firms, private banks, and high-net-worth investors.
The survey found that 66% of respondents plan to increase their exposure to actively managed ETFs, while 54% intend to add fixed income ETFs to their portfolios within the next year.
Fund management firms exhibit the most significant interest in ESG ETFs, whereas private banks demonstrate higher demand for defined outcome ETFs (also known as buffered ETFs), as well as ESG and currency products.
As of June, the ETF assets under management in Greater China stood at $557 billion, making up 38% of the total $1.49 trillion ETF assets in the region.
The ETF growth rates in Greater China outpaced those in global markets and other regional markets, albeit from a low base. In the first half of 2024, Greater China markets attracted $102 billion in net new flows, representing 70% of all net new flows across the Asia-Pacific region.
The survey revealed that about 77% of ETF investors in Greater China plan to increase their use of ETFs over the next 12 months, driven by the availability of more local products and investors' growing familiarity with the asset class.
“We continue to see interest and demand increasing from investors overall, and that also is consistent and aligned with increasing capital flows that are coming into ETFs across the mainland, Hong Kong and Taiwan,” said Pigott.
BROAD USE CASES
Pigott emphasised the multifaceted nature of the growing interest in ETFs, citing their structural benefits such as lower costs, transparency, and efficiency as vehicles for market access, particularly when investors prefer indirect exposure to certain markets like emerging economies such as India.
Throughout the region, investors primarily use ETFs as satellite holdings in their portfolios, for liquidity management and cash equitisation, or to express short-term or tactical views, aligning with the interest in thematic and sector-specific products such as technology-focused ETFs.
“The broad number of use cases that ETFs have is a tailwind in terms of ETF investment across the region. As investors are becoming more savvy, more aware of the benefits of ETFs, we're continuing to see an uptick in allocations overall,” Pigott said.
“We're highly optimistic about the ongoing growth in terms of institutional investors use of ETFs in the region,” he said.
The growth is expected to be driven by the expansion of local product offerings, complemented by overseas-listed ETFs, providing investors with a more comprehensive toolkit. This expansion includes the continued development of actively managed ETFs across Greater China markets.
While locally listed ETFs are gaining traction for Asian market exposure, US and European-listed ETFs continue to constitute a substantial portion of regional investors' portfoliosthe survey noted.
DISTRIBUTION HEADWINDS
Pigott identified distribution through certain bank channels as a significant obstacle to the growth of ETF investments in the region, particularly as issuers seek ways to scale their products.
As most Asian markets have bank-dominated distribution channels closely aligned with different types of trailer fees and retro sessions, or retroactive commissions, mutual funds are better established to align with these sales strategies compared to ETFs, Pigott noted.
“That said, the pivot to more digital channels is a tailwind for ETFs. We see that as an important channel that organisations are looking at to broaden their investor reach,” he added.