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Global Investor Study (Part 2): The acceleration of ETFs as a vehicle for Asian fixed income investments

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This is a sponsored article from State Street Global Advisors.

Kheng-Siang Ng
Asia Pacific Head of Fixed Income
State Street Global Advisors

In our previous article, we discussed a recent Asian fixed income survey from Greenwich Associates1 which found 95% of existing investors planned to either increase or retain their allocations to Asian fixed income in the following 12 months, while around one in four respondents who had not invested in the asset class planned to initiate exposure in the same period.

The drivers for this investment trend included higher yields and the favourable macro outlook offered by Asian fixed income. In this article, we turn our focus to another key driver — the way in which Asian markets are becoming more liquid and integrated into the broader universe of global fixed income — and examine how investors gain exposure to this asset class.

China bonds reshape our investment horizons
In 2019 and 2020, 364 onshore Chinese bonds will be added to the Bloomberg Barclays Global Aggregate Bond Index, and by the end of 2020, onshore renminbi-denominated Chinese bonds will make up an estimate of 6% of the index. The integration of China’s US$13 trillion bond market into the global fixed income market is a milestone for Asian fixed income markets, with more than 40% of study participants citing index inclusion as one of the key reasons to increase existing exposure.

While this may only be one index, Chinese government bonds are also on a watchlist of bonds to join both the FTSE Russell’s World Government Bond Index and the J.P. Morgan Emerging Markets Government Bond Index Global Diversified. This indicates the world’s second-largest bond market will open up to an even more extensive investor base in coming years. It is worth noting the study revealed demand for Chinese assets is the main driving force for global demand for Asian bonds, with two-thirds of respondents selecting China as the most attractive source of investment from a list of major government bond markets in Asia ex-Japan.

ETFs gain traction in Asian fixed income portfolios
Although most study participants obtained exposure to Asian bonds through active strategies, passive investments are also on the rise as more Asian fixed income is included in global indices.

The study found 58% of respondents gained Asian fixed income exposure through direct, active investments. Exchange-traded funds (ETFs) — used by around one-quarter of the global study participants — ranked fourth among the vehicles used to gain exposure to the asset class, behind active segregated mandates and mutual funds.

Of the passive vehicles, ETFs proved the most popular among respondents, and were gaining traction in Asian fixed income portfolios. More than one in five respondents said they were considering an investment in Asian fixed income ETFs — topping all other vehicles. ETFs may soon approach active mutual funds as one of the most-used vehicles for the asset class.

Potential benefits of liquidity, diversification and cost efficiency
Liquidity was cited as the leading benefit of fixed income ETFs. 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 and redemption process in the primary market — as a means of addressing liquidity concerns and enhancing the liquidity of their overall bond portfolios.

Investors interviewed for the study also valued ETFs for their ability to deliver diversification in a single trade and the fact that such funds 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, Asian bond markets have now matured in both breadth and depth, and have the liquidity and infrastructure needed to meet the requirements of an expanded investor universe. This movement is reaching a high water mark 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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This is a sponsored article from State Street Global Advisors.

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