Fixed-income ETFs are proving increasingly popular among Asian insurers, Mr Geir Espeskog, Head of Asia Pacific Distribution at iShares, Blackrock, told Asia Insurance Review in an exclusive interview.
The American asset manager has seen an inflow of US$1.6 billion into its ETFs – called iShares – so far this year from Asian insurance clients, with one-third of that going into fixed income ETFs.
iShares currently oversees US$8.4 billion of AUM for insurers in Asia, a fraction of the estimated US$2.3 trillion managed by the Asian insurance industry, but Mr Espeskog said he was confident this share will continue to increase as insurers gradually understand the benefits associated with using ETFs.
Liquidity and cost-efficiency
Mr Espeskog said the investment tool was proving to be attractive to insurers looking to build a yield portfolio and diversify abroad, without compromising on liquidity and cost-efficiency.
ETFs have the added advantage of offering an additional layer of liquidity, compared to the underlying bonds that they track, a feature that resonates particularly well with insurers, he said.
In terms of volumes, ETFs tracking high yield bonds and investment grade credit trade about five times the underlying bond that they track at any given time, he said. In times of crisis, when liquidity dries up in traditional bond markets, the differential can be 20-fold, he said.
“In times of stress you need liquidity, which bond markets might not be able to offer. Fixed income ETFs allow you to take risk off and add risk on at a much lower cost than with bonds, where the volume and demand is much smaller,” he said.
The relatively lost cost of ETFs also explain the success of these instruments, he said. Fixed income ETFs trade at a tighter spread than traditional bonds, resulting in significant cost savings for investors, he said.
Regulation favours fixed-income ETFs
Regulatory changes in some Asian jurisdictions have also been driving the demand for fixed income ETFs, Mr Espeskog said.
Some regulators across the region are now adopting a different methodology whereby fixed-income ETFs are accounted for as bonds, and not equity. This shift to a “look through” approach witnessed in Korea, Australia, Thailand, Indonesia, and China means that insurers investing in fixed-income ETFs will be required to put up less capital as collateral under the new rule.