Surging ETF allocations in fixed income portfolios drive broader ETF growth among Asian institutions

May 4th, 2018 | By | Category: Fixed Income

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Investment in ETFs in Asian institutional fixed income portfolios surged last year, according to the Greenwich Associates’ 2017 Asian ETF Study. In 2017, allocations to ETFs grew to 17.1% of total portfolio assets, up from just 6.6% in 2016.

ETFs gaining popularity with Asian institutional investors, finds Greenwich Associates

Andrew McCollum, Managing Director at Greenwich Associates.

The recent growth in fixed income ETF allocations has occurred largely at the expense of individual bonds, which made up 58.6% of fixed income assets among study participants in 2016 but only roughly 50% in 2017.

The reported rise in fixed income ETF allocations is part of a broader expansion in the use of ETFs by Asian institutions which, according to Greenwich Associates, are taking advantage of the versatility of ETFs and applying them to a growing list of asset classes and portfolio applications.

The study found that Asian institutions are integrating ETFs into their portfolios to obtain beta exposure in both active and passive strategies.

Across both equities and fixed income portfolios, 45% of study participants currently investing in ETFs expect to increase allocations to the funds in the next year. One-quarter of all ETF non-users say they are likely to start investing in the funds in the next 12 months.

Andrew McCollum, Greenwich Associates consultant and author of the report, commented, “With market volatility on the upswing and interest rates in key markets around the world expected to climb, Greenwich Associates expects this growth in ETF use and allocation to continue over a longer-term horizon.”

Drivers of growth

Across all asset classes, institutions are turning to ETFs for a diverse range of investment exposures, including:

  • International exposures: among study participants, 54% are using ETFs for international diversification, up sharply from about one-third in 2016.
  • Multi-asset exposure: over the last three years, study participants have tripled their use of ETFs in multi-asset funds. The median allocation has grown from just 5% in 2015 to 15% in 2017.
  • Factor exposures: nearly half (47%) of study participants now invest in non-market-cap-weighted ETFs, up from 44% in 2016.

“The fundamental reason that Asian institutions are stepping up their use of ETFs is that, within the context of an institutional portfolio, ETFs have proven to be extremely versatile tools,” said McCollum. “Our research suggests institutions in Asia and around the world will continue applying ETFs to an expanding list of portfolio functions, both strategic and tactical, leading to continued growth in demand and investment.”

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