Strong pick-up in ETF sales seen among Asian institutions

There are clear signs that take-up of exchange-traded funds (ETFs) is picking up sharply amongst Asian investing institutions.

Latest flow data from ETF provider iShares shows how fixed-income ETF sales in Asia have been particularly strong this year, with more than $1.7 billion in sales year to date, against $800 million for the whole of 2014.

The overall trend for ETF sales is also strong, with iShares reporting a sharp rise in the adoption of Ucits ETFs, as investors recognise their particular advantages.

The current purchases of fixed-income ETFs is being boosted by Japanese investment bank money. The banks are buying US and EU exposure through investment-grade and high-yield ETFs, because of liquidity constraints in those markets.

“This trade is particular to Japan because of the tendency for Japanese investment banks to buy non-domestic FI assets for yield,” said Susan Chan, head of iShares Asia Pacific.

The other big-ticket purchases of fixed-income ETFs have been from life insurers. Chan said: “We have had three Japanese insurers buying fixed income ETFs for core balance sheet holdings this year, which is a good sign that they are recognising the versatility of ETFs as instruments. We have also strong pick-up from Singaporean and Taiwanese insurers, though this has been for tactical positions, and some asset managers who are deepening their use of ETFs.”

Korean insurers have also been buying Ucits high-yield ETFs for US exposure as well as US equity ETFs. These fixed-income ETFs flows go against the global trend of fixed-income ETF purchases. Globally, the take-up of fixed income ETFs is still low in comparison to equities. Equity ETFs are around 3% of equity market investments, whereas fixed income represents only 0.4% of the corresponding market.

But global asset manger BlackRock, iShares' parent,  observed that with illiquidity and low inventory levels inhibiting investor access, and spreads for individual bonds at unprecedented levels, “the ability to trade fixed income ETFs on exchange at low bid/ask spreads opens up a growing source of institutional liquidity.”

The other key trend in the iShares data is the strong support for Ucits ETFs. In the last three years, flows from Asian investors into Ucits ETFs have grown from $100 million to $3 billion. Chan said: “One reason Ucits ETFs are chosen is because of the less frequent distributions, making owning the ETF operationally simpler than its US-listed equivalent.”

The low-cost message is also having an effect, with fees as low as 7bps for an S&P500 or FTSE100 ETF, although fees typically range from 25 to 99bps on other ETFs.

The third reason is tax: for countries with no tax treaties with the US, such as Hong Kong and Singapore, there is a capital gains tax advantage on fund distributions from Ucits ETFs, which plays well in the retail and wealth management channels.