Value-conscious institutional buyers are embracing exchange-traded funds (ETFs) to decrease transaction charges and obtain larger returns. Hong Kong Exchanges and Clearing (HKEX) explores the theme of yield‑chasing amongst insurers in Asia’s increasing ETFmarket and why ETFs with a worldwide or regional focus symbolize a low-cost channel to achieve abroad publicity
With rates of interest nonetheless near document lows, lukewarm fixed-income returns are prompting pension funds and insurers to hunt for different funding choices. These cost-aware institutional buyers have been more and more embracing ETFs to decrease transaction charges and obtain larger returns.
Scorching in Asia
Yield-chasing has been a persistent theme amongst Asian insurers. “As low rates of interest scale back the income-generating means of fixed-income investments, insurers need to diversify their return sources,” says Brian Roberts, senior vice‑president and head of exchange-traded merchandise at HKEX. “Buyers can’t management market returns, however can management charges that eat away at their returns. The low-cost, tax-efficient nature of ETFs is likely one of the causes we’re seeing stronger curiosity amongst insurers.”
In line with knowledge compiled by analysis supplier ETFGI, Asia’s ETF market has grown by round 10% within the first six months of the yr to US$458.1 billion. The urge for food for ETFs exhibits no indicators of waning – a survey by the Asia ETF Discussion board revealed round 70% of institutional buyers anticipate to extend allocation to ETFs sooner or later.1
Insurers’ ETF playbook
Asia’s ETF market presents an increasing palette of selections. With new exchange-traded product launches reminiscent of sensible beta ETFs and leveraged and inverse merchandise, insurers are more and more turning to ETFs as a sub-account choice to implement refined tactical methods. Outlined-benefit plans have already began utilizing ETFs; with the introduction of target-date and target-risk ETFs, defined-contribution funds are coaching their sights on ETFs too. Such merchandise are probably effectively suited as balance-sheet belongings for insurance coverage corporations.
The impression of pension cash fuelling ETF belongings progress turns into obvious. This excessive progress comes at a time when the insurers are struggling to attain a 3–4% return to cowl cost obligations to policyholders. At the moment, Asian time period deposits yield as little as 1% whereas belongings larger up the chance curve reminiscent of equities are saddled with excessive transaction prices.
Because the liberalisation of Asia’s creating markets and its swelling retirement financial savings spur demand for abroad funding, offshore funding restrictions are more and more painful for cash managers who wish to go world. On this regard, ETFs allow insurers to beat some abroad funding restrictions.
ETFs with a worldwide or regional focus symbolize a low-cost channel to achieve abroad publicity. Insurers now get customised merchandise from fund managers to focus on sure exposures that boast tax incentives and better yields. Investing in abroad markets by way of ETFs additionally reduces the necessity for hedging, which is necessary for overseas investments in some markets.
Leveraged and inverse
Earlier than the arrival of leveraged and inverse ETFs, insurers hedged with quick futures. That entailed rolling over the longer term contracts, figuring out the hedge ratio, assembly margin necessities and factoring within the premium/low cost on their hedge.
Leveraged and inverse ETFs emerge as an excellent hedging instrument for insurers. “ETFs permit buyers to higher handle portfolio dangers,” says Jackie Choy, director of Asia ETF analysis at Morningstar Funding Administration Asia. “The usage of futures and choices must be disclosed in separate books. That is one more reason why leveraged and inverse ETFs’ hedging functionality appeals to institutional buyers.”