Insurers driving ETF growth in Asia, say experts

The adoption of exchange-traded funds (ETFs) in Asia still lags a long way behind US and European levels, but for regional asset owners – particularly insurers – they are increasingly useful tools for generating tactical alpha and building efficient portfolios.

Total assets invested into Asia-Pacific ex Japan-listed ETFs and exchange-traded products (ETPs) was $184 billion as of September 2018, compared with $3.73 trillion in the US and $832 billion in Europe, according to data from ETF consultancy ETFGI.

Even so, September marked an 11th straight month of net capital inflows into ETFs and ETPs listed in Asia, ETFGI data shows, with institutional investors playing a key role.

And insurers are a key component of that segment, said Geir Espeskog, head of iShares Asia-Pacific distribution at BlackRock, the world's largest asset manager.

“[There's] been a market uptick in insurance usage, and usage overall, and if you look at it in the context of markets which have been pretty tough this year with a couple of large sell-offs happening early this year, most recently in October, … there's a structural growth trend that's driving the use of ETFs here in Asia from institutional clients,” Espeskog told AsianInvestor.

Of the $122 billion in Asia-Pacific assets under management at iShares – BlackRock’s family of ETFs – insurers held about $27 billion at the end of the September. Crucially, the inflows from this investor group in the third quarter were more than four times what BlackRock saw from insurers in all of last year.

“We’ve seen around $22 billion of inflows across the region [but] then insurers are about $7.6 billion of that, roughly a third, so they’re a key user of ETFs across the region,” Espeskog said.

It's a point also made by Lee Taeyong, global head of ETFs and ETPs at Swiss firm Amun AG and previously global head of ETFs at Mirae Asset Global Investments, when contacted by AsianInvestor.

Asset owners like insurers are one of the main growth drivers for ETFs in the region, he said.

In Japan especially, but not solely, insurers are reportedly using ETFs for their balance sheets to tactically generate alpha through asset allocation.

“They are looking for low costs, they’re looking for liquidity, easy access in and out, and they play around with their benchmarks, mostly on equities," BlackRock’s Espeskog said. "But I’ve also seen some increased use of smart-beta ETFs – they’re playing momentum, for instance, and trying to generate alpha on top.” 

ETFs are very liquid and therefore the benefit to the asset owners is that they can exit pretty quickly, Janet Li, wealth business leader for Asia at Mercer, told AsianInvestor. 

“Under any market conditions, if they want to change their portfolio, then they can reasonably expect to get the cash back or try to invest into markets more quickly than other means of investment, and at the same time give them diverse exposure,” she said.

For strategic asset allocations, the low fees associated with ETFs are a major factor for asset owners like insurers, especially for long-term returns, Amun AG’s Lee said.

“They use ETFs as major building blocks for their asset allocations, for global strategies or industry strategies … They use the ETFs for core and satellite strategies, so it is very useful in terms of implementing various asset-allocation strategies,” Lee told AsianInvestor.

A case in point is Taiwan, where insurers are increasingly using ETFs within investment-linked policies as core components of their portfolios, Espeskog said.

“They’ll fill certain gaps or certain parts of their asset allocations with ETFs – in some cases, they fill their whole asset allocation with ETFs. We’ve seen the segment in Taiwan grow rapidly,” he said.

BlackRock has raised around $1.35 billion in the investment-linked ETF segment in Taiwan this year and total Taiwanese iShares assets in this segment amount to around $3 billion, Espeskog added.

“They're looking for liquidity, they're looking for low cost, and I think the realisation we see, not just in insurance but in many segments, is that a key driver of long-term performance is asset allocation,” he said.

LOOKING AHEAD

Going forward, the growing popularity of ETFs among Asian insurers and other institutional investors should result in a higher usage of more innovative ETFs.

“In recent years, because generally seeking alpha is not easy, coupled with the fact there are many more innovative ETFs that are being launched in the market and many more choices for investors, that definitely provides some good alternatives for asset owners to choose from,” Mercer’s Li said.

“Particularly in Asia, I think we’re going to continue to see the rise in smart-beta products, and probably further development of bond products,” Amun AG’s Lee added.

Prudential Corporation Asia, for example, is increasingly using factor-based ETFs and ETPs to diversify its portfolios and generate more alpha.