Monday, February 20, 2017 Stamford, CT USA — Exchange-traded funds are attracting new institutional users and assets in Asia. 

In a new report, ETFs: Asian Institutions Broaden Application, Greenwich Associates interviewed 59 institutional investors for its 2016 Asian ETF Study and found a steady increase in ETF allocations among existing institutional users in the region and the continued entrance of new users as additional institutions make their initial forays into ETF investing. 

“Fueling this growth in Asia—and indeed around the world—is institutions’ continued adoption of ETFs for an expanding list of functions within their portfolios,” says Greenwich Associates Managing Director Andrew McCollum.  

The results of the 2016 Asian ETF Study show they are broadening their use into applications ranging from strategic priorities like portfolio diversification and risk management to shorter-term tasks to make tactical adjustments to portfolios, take on interim beta, liquidity management, and cash equitization. 

This advance of ETFs into new areas and applications will continue to drive growth. Half of current equity ETF investors in the study say they plan to increase allocations to these funds in the year ahead, with the majority of those expecting increases of more than 10%. A full 44% of fixed income ETF investors plan to increase allocations to bond ETFs in that period. 

Several additional trends will fuel continued ETF growth in Asia:

• Increasing volatility and rising rates should stimulate fixed-income ETF use. Asian institutions say they employ ETFs largely because they are easy to use, offer quick access and provide liquidity benefits. These characteristics become ever more valuable during periods of volatility. Institutions with plans to increase allocations to fixed-income ETFs cite expectations for a shift in the interest-rate environment as the primary reason they plan to step up their use of bond ETFs.

• Multi-asset funds are accelerating demand for ETFs.  Asian asset managers are building multi-asset funds using ETFs and over 50% incorporate ETFs in their multi-asset funds and some will use ETFs for more than 80% of the assets in the fund.

• Smart beta ETFs are gaining ground. Use of non-market-cap weighted/smart beta ETFs has nearly doubled in the past 12 months. Looking ahead, 54% expect to increase their allocations to smart beta even further with investments in dividend/equity income, sector smart beta, smart beta commodities, and smart beta fixed income, among other categories.