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Why Bond ETFs Booming in Taiwan Onshore Fund Market?


Though the market is volatile in 2018, Taiwan onshore fund market continues to break the size record. Bond ETFs is the killer product. Here are the reasons......

Photo by Sharon McCutcheon on Unsplash

Taiwan onshore fund market continues to break the highest record to US$92,442Mn in Jan-2019. Taiwan Insurers play the significant role through pumping money into Target-maturity-bond-fund and Bond ETFs. About the observation on Target-maturity-bond-fund in market, please refer to the last NIC insights “Target-maturity Bond Fund Boost Taiwan Onshore Fund Market


ETFs market's booming in 2018, the total AUM increased to 28.17% of the total of onshore funds market. In Jan-2019, the momentum remains strong. The total of ETFs AUM is up to US$27,895Mn, 30.18% of all onshore fund market.


Bond ETFs increased most and led the ETFs size jump. It’s denominated in Taiwan dollars and invest offshore bonds, and an emerging type in Taiwan onshore market. The first one launched on Jan 11th, 2017 by Yuanta STIEs, Yuanta U.S. Government Bond of 20-year tenors ETF. And then the market grows in an unprecedented speed with 54 launched and US$15,598Mn in AUM, as of Jan-2019, 55% of overall ETFs market in only 2 years.


Client focus changes: from Retail to Institution

Taiwan ETFs market is used to be focus on the retail market and all are equity ETFs. The indices the underlying tracks are various, and the strategies are diverse, especially, Yuanta released invers and leveraged ETFs of TWSE and CSI300 Index since 2014. Future and commodities ETFs are issued followingly. However, as the retail market for ETFs is not quite big to appeal to SITEs' join into the war, only 6 SITEs as providers since 2003.


The market shift dramatically since 2017 while insurers are seeking for high yield solution.


Bond ETFs carter to Insurers need for yield chasing

1. Lack of fixed income products denominated in local currency to match Lifers’ fiscal liability requirements 2. New restriction on Formosa Bond investment urged Lifers’ to seek for new solutions 3. Bond ETFs issued by Taiwan SITEs provide customization without investment limitation

1. Lack of fixed income products denominated in local currency to match Lifers’ fiscal liability requirements

Taiwan insurers are facing 6% high liabilities issue from legacy product and the average liability cost is around 4%. When the environment is low interest rate and market volatile, lifers are desperate for higher yields. However, the yield from Local fixed income product can only provide 0.8~1.5% yield cannot meet the expectation which has huge yield gap with liability cost.


2. New restriction on Formosa Bond investment urged Lifers’ to seek for new solutions

Investment overseas can deliver the quite high yield, but the ceiling is at 45% of lifer’s asset. Formosa Bonds are not included until the late 2018.


Formosa Bonds, rated triple B or higher and with averaged 4% yield issued in Taiwan but denominated in local currency are excluded from the ceiling of insurers’ 45% overseas investment since Jun 2014. It’s growing in popularity among Taiwan insurers over the past years. As of Sep-2018, the total size is US$ 138,007Mn.


From Taiwan regulator’ perspective, they need to control the overall currency risk exposure of lifers, especially the hedging cost is getting higher in recent environment. A new limitation put on Formosa Bond investment since Nov21st, 2018. The cap is up to 65.25% (145% of approval overseas investment limit, the highest is up to 45%).


Since the demand for high yields from Taiwan life insurers remains strong, bond ETFs become the new way out for them.


3. Bond ETFs issued by Taiwan SITEs provide customization without investment limitation

Bond ETFs are denominated in Taiwan dollars and invest offshore bonds provides 4% or higher yield issued by Taiwan SITEs.


According to the regulations, insurers’ investment into one single SITE fund is not allowed over 10% of net asset value of the fund. But ETFs is classified as a securitized product instead of a mutual fund by the authority, there is no 10% ceiling for Taiwan insurers investment. Without the limitation, insurers could request 100% customized Bond ETFs from SITEs.


Customized and deliver high yield, Taiwanese insurers have growing appetites for Bond ETFs enables them to structure their portfolios in a more flexible way.


Local insurers allocating more capital to Bond ETFs spurs Taiwan SITES to issue more products since 2017. As of end-2018, 29 new launches and there are another 10 launched in Jan-2019.


Capital SITE leads the Bond ETFs market

Historically, Taiwan ETFs market is dominated by Yuanta SITEs, the pioneer of Taiwan ETFs markets.  As of now, Yuanta is still the champion of the overall ETFs markets with US$10,782Mn in AUM, followed by Cathay with US$4,928Mn in AUM.  On the other hand, Capital plays hard to issue Bond ETFs and successfully jump to the first place after launched 8 ones.


U.S. Government/ Sovereign Bond Index are most favored by the investors

To meet lifers, need for high yield, the Bond ETFs underlying track indices are classified of 5 assets and tenors are up to 20 years:

  1. U.S. Government or Sovereign Bond Indices.

  2. Investment Grade Bond Indices.

  3. China Government& Policy Bank Bond Indices.

  4. Emerging Market or High Yield Bond Indices.

  5. Investment Grade Bond Indices of sectors (Telcom, Tech, Financial…etc.)

Notably, 15 of 54 Bond ETFs track U.S. Government or Sovereign Bond Indices.


New limitation may roll out to cool down the Bond ETFs heat

Bond ETFs have been the prevailing theme over the past two years, and the trend is likely to persist over the longer term with the growing institutional demand. Taiwan onshore fund market size MoM grows 7.8% to US$92,442Mn, hit another record high. Meanwhile, international ETF increased 7.1%.


Worried about the potential liquidity and exchange risks, Taiwan authorities have informally warned local insurers of the rising risks stemming from their investments in local listed Bond ETFs.


A new rule may be put in place to limit the investment from insurers, the proposal could be extra risk charge for Bond ETFs when calculating RBC ratio. The original risk coefficient for bond ETFs is 0.081. It could possibly be raised to 0.142 which is almost double risk charge and could trim down the incentive to invest in bond ETF a lot.


Creative Bond indices fulfill insures needs

Nevertheless, the high yield demand of insurers there, SITEs will continue to IPO more Bond ETFs. A creative idea of an Indices generating high yield are urged by insurers and SITEs on product development. Wants to talk about your index idea? Just contact us, we can arrange the discussion with insurers or SITEs.