What are the latest trends in fixed income ETF investing in Asia?
Asian institutions are increasingly integrating fixed income ETFs into their portfolios as a tool for obtaining beta exposures in their asset allocations. With increased market volatility and interest rates on the rise in the US, fixed income ETFs have been a tool of choice for our clients to reposition their portfolios to the new norm. Some did so by reducing the duration of their portfolios with floating rate note ETFs or short maturity ETFs. Alternately, clients have separated their interest rate risk and credit risk using interest rate hedged ETFs.
Are you still seeing investors switching from equities to FI ETFs?
Treasuries rather than bonds are seen as safe havens in periods of market volatility. In such markets, investors reassert a more normal balance between stocks and bonds. However, long term investment rotation is more than a simple move from stocks to bonds. Investors, particularly on the institutional side, are looking at risks in both asset classes. We see risk rotations taking place within asset classes rather than by switching from equity into bonds ETFs.
How has decreased bond liquidity and constrained bank balance sheets driven up the cost of transacting in the underlying market and driven clients' adoption of FI ETFs?
Building fixed income portfolios solely with individual securities is increasingly costly and less efficient than in the past, due to the cost of inventory in banks which used to provide bond liquidity. This has led investors to employ a range of instruments, from ETFs to synthetics, which can be used as building blocks to construct portfolios and manage risk more efficiently. Demand for transparent, standardized and bundled instruments has materialized in the growth of index-based products like credit default index swaps, total return swaps and fixed income ETFs. The distinguishing advantage of ETFs is the physical replication, exhibiting higher correlation with underlying markets and allowing for creation and redemption in kind.
Japan has seen greater popularity of FI ETFs – how does China, HK, Singapore compare?
Japan indeed has seen increased interest in ETFs offering global fixed income exposures, as local investors are searching for yield abroad. Asian institutions' need for international exposures to diversify investment portfolios is partly due to the lack of local supply in bond instruments, and is emerging as one of the biggest sources of fixed income ETF demand in the region. For instance, in Taiwan locally domiciled fixed income ETFs offering international exposures have grown US$7.1 billion year to date. Hong Kong and Singapore are iShares' largest fixed income ETF market in Asia (ex-Japan). China, on the other hand, has been slower to adopt fixed income ETFs. This can partly be attributed to the fact that local interest rates are still higher than in US or Europe and due to restricted access to foreign assets.
What is the breakdown between institutional and retail client adoption of FI ETFs in APAC?
Across global and locally domiciled fixed income ETF flows in APAC, the majority of flows come from institutional investors. Passive adoption by retail investors in Asia still suffers from retrocession-based distribution models and requires more client education.
What the pros and cons of investing in fixed income ETFs in the current market environment?
Institutions rely on ETFs as liquid, easy-to-use and relatively low-cost tools for a wide range of purposes, including managing cash flows and making tactical adjustments to their portfolios. Furthermore, ETFs are a simple way to manage duration and credit within portfolios. However, the level of fixed income indexed assets has yet to see the same development of indexed equities, where multiple sectors, countries, and factors are readily available as building blocks.
Ecaterina Bigos is a product strategist for Fixed Income iShares in APAC and leads the APAC EII Fixed Income initiative. She is responsible for developing strategic plans around iShares fixed income product positioning in the region, supporting client engagement through the sales channels and evolving fixed income ETF applications across the client channels. Ecaterina joined BlackRock in 2012 in the London office in a similar capacity and relocated to Asia in 2015. Ecaterina is a member of BlackRock's Women's Initiative Network Committee in Asia.
Ecaterina holds a master in finance from Cass Business School and a bachelor degree from Academy of Economic Studies in Bucharest.
