ETF market eyes pension money

Could Taiwan’s ETF market be nearing its peak?


27 Oct 2017


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 TAIWAN’S exchange traded fund (ETF) market has been surging ahead in the last many years, but the industry is becoming increasingly cautious, fearing its growth may be reaching its peak.

Julian Liu, Yuanta SITIC CEO and president, told participants of The Asset 3rd ETF Summit in Taipei last month that the ETF market has recorded impressive numbers over the years, but there are concerns on whether its growth momentum can be sustained.

“It has almost hit the top for the entire market in terms of assets under management (AUM), ETF growth and potential because the Taiwan market in terms of size is actually quite limited,” says Liu. Yuanta SITIC is the largest ETF provider in Taiwan.

Liu says demand still has some way to go before it could catch up with the growing supply of ETF products. However, he believes that there are still pockets of opportunity for the market going forward that providers can explore.

Taiwan’s ETF market has come a long way. Following the introduction in 2003 of the Polaris Taiwan Top 50 Tracker Fund – the island-state’s first ETF – the industry saw the launch of 65 more in the last 14 years. As of March 2017, the industry is worth NT$284.8 billion (US$9.47 billion), according to the Securities Investment Trust and Consulting Association.

The market’s success can be attributed in part to the government’s strong support. Taiwan’s Financial Supervisory Commission (FSC) has implemented a number of market-friendly policies over the years. Recently, it relaxed policies around overseas ETFs and the use of leveraged and inverse products.

The government continues to encourage innovation in the market. One potential source of growth is the institutional investor space. From pension funds to insurance companies there is growing evidence that institutional investors globally are looking at allocate more money to passive strategies. The world’s largest pension fund, Japan’s Government Pension Investment Fund, invests in ETFs. Recently, it said it would shift about US$8.8 billion or 3% of its passive domestic equity investments into indices tracking socially-responsible investments.

Globally, institutional investors are increasing ownership of ETFs. Data from Deutsche Bank shows that institutional investors have increased their allocation to ETF assets by US$1.4 trillion this year, up from US$213 billion a year earlier. Institutions’ share of ETF assets now accounts for nearly 60% of total.

“Pension funds would want to give some allocation (to the ETF market) because of ETFs’ low cost and transparency,” explains Jeff Chang, vice chairman of the Pension Fund Association R.O.C. and chairman of Cathay Securities Investment Trust.

“They can have a Taiwan ETF, but the underlying (asset) is a US fixed-income fund. They can enhance their yield. ETF is a good tool for tactical investment because the market is always volatile.”

Liu shares this view. “Taiwan will have a lot of opportunity if we can attract the pension funds or foreign funds.”

In view of strategies, global institutional investors have started turning to fixed income ETFs, a segment of the market that has grown rapidly over the past two years. Bond ETFs received US$91.6 billion in inflows in 2016, up 50% from a year ago, Morningstar data show. The rush into bond ETFs could be a sign that investors are finding the traditional bond space relatively illiquid and costly to access compared to before, notes an industry source.

Within Taiwan, the fixed income ETF space is still in its early days. So far, Yuanta SITIC has listed two ETFs to track the ICE US Treasury 20+ Year Bond 2X Leveraged and 1X Inverse indices.

Chang says Cathay Securities Investment Trust will focus on onboarding institutional investors going forward. “We believe allocation from institutions has just started,” says Chang. Retail investors will remain major participants of ETF trading in the near term, he adds.

Despite looming risks in the market, Liu says this gives domestic ETF providers an opportunity to self-evaluate and evolve. “We have to upgrade from an ETF provider to a solution provider, and to an advisor,” he says. “We currently don’t have a lot of this new product generation or change from product provider to solution provider.”

During The Asset 3rd ETF summit, FSC vice chairman Tien-Mu Huang reaffirmed the government’s commitment to introduce policies that will attract foreign funds to the local market. Education around ETF investing is also a focus for the FSC.

“We want to emphasize the risk features and characteristics of ETFs. When people choose their financial tools, they need to know the meaning behind those tools. Because of the expansion of the ETF (market), we need to understand the risks behind such expansion,” Huang adds.


27 Oct 2017


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