Wednesday, April 10, 2019 Stamford, CT USA — Allocations to exchange-traded funds (ETFs) in Asian institutional portfolios increased sharply last year. For institutional ETF investors participating in the most recent Greenwich Associates Asian ETF Study, average ETF allocations grew to 23% of total assets in 2018 from 14% in 2017.
This growth was driven in large part by institutions’ need to reposition their portfolios amid a dismal year in Asian equities and a surge in global market volatility. “As institutions responded to these difficult conditions, they increased their investments in ETFs, which served as a flexible tool for rapidly implementing tactical adjustments and strategic shifts across asset classes,” says Andrew McCollum, Greenwich Associates Managing Director and author of In Volatile Markets, Asian Institutions Turn to ETFs.
Three additional trends contributed to last year’s fast growth in institutional ETF investments in Asia:
- Indexation: The continued shift of assets from active management to index strategies created strong demand for ETFs, the vehicle of choice for index exposures for 9 out of 10 study participants.
- Bond ETF Boom: Investors in bond ETFs increased allocations to the funds last year by over 50% on average, to more than a quarter of total fixed-income assets. Driving this shift was investors’ continued search for a reliable source of fixed-income market liquidity.
- Smart Beta Adoption: Smart beta ETFs are now used by 70% of Asian study participants. A third of those respondents plan additional increases to factor-based ETF allocations in 2019, with a majority of those expecting to boost allocations by more than 10%.
These trends are expected to remain in place and push ETF investment even higher in 2019. Greenwich Associates is projecting continued strong growth in the next 12 months not only in fixed income, but also in equities, where nearly half of ETF investors in the 2018 study are planning to expand ETF allocations in the coming year.
“Over a longer horizon, the continued growth of China as both an economy and a source of investment opportunities will create new demand for ETFs in Asian institutional portfolios,” says Andrew McCollum. “More than 85% of study participants investing in China name ETFs as their vehicle of choice for China exposures.”