Taiwan Is Home to the World's Fastest-Growing ETF Market

(Bloomberg) -- A surge in bond-buying from life insurers has made Taiwan’s exchange-traded fund market the fastest-growing in the world.

Taiwan’s insurers are snapping up ETFs domiciled locally, but comprised mostly of U.S. corporate bonds, as they seek to offset lower yields on other investments. That’s spurred a 67% growth in the ETF market this year -- faster than all the Group of Seven economies as well as China -- pushing its overall size to $41 billion, data compiled by Bloomberg showed.

While that’s only a fraction of the $5.3 trillion pie globally, Taiwan’s ETFs are also grabbing share from traditional products, with assets growing to the equivalent of 50% of those held in mutual funds versus 18% early last year. Unlike mutual funds, ETFs can be traded in real time. The central bank has previously warned that insurers snapping up local ETFs comprised of foreign assets increases the industry’s exposure to risks in currency fluctuations.

Regulations controlling insurers’ investment strategies are stoking the growth.

• ETFs that are denominated in the local dollar and listed in Taipei aren’t counted toward limits on overseas assets. That’s even as most of Taiwan’s ETFs invest in U.S. credit, which yields more than domestic bonds.
• An insurer is allowed to buy as much as 50% of a single newly issued ETF, versus just 10% of a bond mutual fund.
• While each insurer can only put 10% of their portfolio into ETFs, that threshold is a long way off. Insurers held NT$676 billion ($22 billion) of bond ETFs as of May, equivalent to about 2.7% of their investments, according to calculations by Bloomberg based on data from Taiwan’s Financial Supervisory Commission and the Taiwan Insurance Institute.

“The trend is expected to continue in the second half of the year due to the investment needs of insurers,” said Jeff Chang, chairman of Taiwan’s Securities Investment Trust and Consulting Association, adding that a bullish outlook for bonds will also boost the market.

Bloomberg Intelligence analyst Steven Lam agrees that the rapid growth of ETFs in Taiwan will sustain. "The demand from life insurers remains strong, especially under the low-yield environment," he said.

The growth stands out at a time when the global ETF market suffered its first monthly net outflow in five years, according to data from research firm ETFGI. Assets invested globally fell 4.6% in May from a record $5.6 trillion in April, a report last month showed. Despite that setback, BlackRock Inc. expects global bond ETFs to double to $2 trillion in five years.

Taiwan Cash-Rich Insurers Brave New Rule to Buy Bond ETFs

There are another 24 bond ETFs still in the pipeline this year, according to data from the Taipei Exchange, which is expected to add another $7.2 billion to the market by the end of the year. In Taiwan, insurers account for 93% of the assets invested in the bond ETF market, data from the Financial Supervisory Commission showed.

"We can’t do without insurers for asset growth, but we can’t rely only on insurers for the growth," said Liu Tsung-sheng, chairman of Taiwan’s largest ETF provider Yuanta Securities Investment Trust Co.

Taiwan’s life insurers control some NT$27.8 trillion in assets, one of the largest pools of money in the world, according to data from the Taiwan Insurance Institute.

--With assistance from Zijing Wu.

To contact the reporters on this story: Cindy Wang in Taipei at hwang61@bloomberg.net;Miaojung Lin in Taipei at mlin179@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Magdalene Fung

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