Asian fixed income ETFs build appeal with investors

Debt investing in Asia is gaining appeal among existing investors, as was underscored by a new Asian fixed income survey from Greenwich Associates¹. That survey highlighted how 95% of existing investors plan to either increase or retain their allocations to Asian fixed income in the next 12 months, and that one-quarter of respondents who had not invested in the asset class planned to begin to do so during that period.

Key drivers for this investment trend have included the higher yields offered by some regional fixed income, plus Asia’s generally favourable macro outlook. However, there is another motivator – the growing liquidity and integration of Asia’s fixed income markets into the broader universe of global fixed income. 

CHINA’S FIXED INCOME APPEAL

Across 2019 and 2020, 364 onshore Chinese bonds will be added to the Bloomberg Barclays Global Aggregate Bond Index. By the end of next year, onshore renminbi-denominated Chinese bonds will make up an estimated 6% of the index.

Kheng-Siang Ng

The integration of China’s $13 trillion bond market into the global fixed income market is a milestone of Asian fixed income markets. 41% of the study participants cited index inclusion as one of the key reasons to increase existing exposures.

While renminbi bonds have only been included in one index so far, the, China’s government bonds are also on a “watchlist” of bonds that could potentially join both the FTSE Russell’s World Government Bond Index and the JP Morgan Emerging Markets Government Bond Index Global Diversified. If the bonds end up being included in these indices, it would suggest the world’s second-largest bond market will open up to an even more extensive investor base over the next few years.

It is worth noting the Greenwich Associates study revealed that demand for Chinese assets is the main driving force for global demand for Asian bonds, with two-thirds of study respondents selecting China as the most attractive source of investment from a list of major government bond markets in Asia ex-Japan.

ETFS’ RISING OPPORTUNITY

While most participants in the study said they obtain their Asian fixed income exposures through active investment strategies, passive investments are also on the rise, courtesy of more Asian fixed income being included in global indices.

All-told, 58% of study respondents said they currently get Asian fixed income exposures through direct, active investments. Exchange-traded funds (ETFs) rank fourth among vehicles they use to gain exposure to Asian fixed income, following active segregated mandates and mutual funds. Overall, about one-quarter of global study participants said they use ETFs for the asset class. That made ETFs the most popular passive vehicle among study participants, and is an indication that they are gaining traction in Asian fixed income portfolios.

Twenty-two percent of respondents indicated they are considering an investment in Asian fixed income ETFs — the highest ranking of all available vehicle options. ETFs may soon approach the popularity of active mutual funds as one of the most used vehicles for Asian fixed income investments.

POTENTIAL BENEFITS: LIQUIDITY, DIVERSIFICATION, COST EFFICIENCY

Liquidity was named the top benefit of fixed income ETFs by Greenwich Associates study participants. Growing numbers of institutional investors and private banks see the addition of ETFs, with their ease of trading on exchanges intraday and through the creation/redemption process in the primary market, as a means of addressing liquidity concerns and enhancing the liquidity of their overall bond portfolios.

Investors in the study also valued ETFs for their ability to deliver diversification in a single trade, and the fact the products can represent a lower-cost alternative to other vehicles due to their relatively low expense ratios and transaction costs.

After decades of development and years of rapid growth, the breadth and depth of Asian bond markets have now matured, and they now have the liquidity and infrastructure needed to meet the requirements of an expanded universe of investors. This progress is reaching a tipping point with the inclusion of domestic China bonds into one of the industry’s important index benchmarks.

As other index providers follow suit, this integration will open the door to a wave of new investors and investment assets.

Visit www.abf-paif.com/survey* to access the full Greenwich Associates Study Report.

_{1 State Street Global Advisors commissioned Greenwich Associates to conduct a global study of 151 institutional investors and 36 intermediary distributors from Asia Pacific, Europe and the United States between October 2018 and March 2019.}

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