By Denise Wee October 23, 2017, 5:00 AM GMT+8 October 23, 2017, 10:09 AM GMT+8

Harder for small investors to buy bonds from banks: BlackRock
Fixed-income ETFs see $129.4 billion net inflows: Morningstar

Smaller Asian bond investors overlooked by banks are increasingly turning to exchange-traded funds to get exposure to fixed income, according to BlackRock Inc., the world’s largest money manager.

“Banks are using their balance sheet for bigger institutions,” said Sean Cunningham, head of capital markets and fixed income for iShares and index investing in Asia-Pacific at BlackRock, whose assets under management total $5.7 trillion as of June 30. “Smaller investors, including private banks, that are not high-commission payers are finding it harder to buy bonds from banks.”

For the first time this year, the firm has seen a 50-50 split between its Asia-Pacific institutional and non-institutional investors buying fixed-income ETFs, Cunningham said in an interview. The previous three years have consistently been skewed toward institutional investors taking 70 percent and the remaining 30 percent from non-institutional investors, he said.

Stricter capital rules have prompted global banks to cut back on bond trading, and investors have been flocking to exchange-traded funds. Globally, fixed-income ETFs have seen net inflows of $129.4 billion this year through the end of September, a 22 percent increase from the same period last year, according to Morningstar Inc. estimates. The search for yield and accessibility through small minimum investment amounts have prompted investors to put money into fixed-income ETFs, according to Jackie Choy, director of ETF research, Asia, at Morningstar.

Despite it being an “equity-centric” year, BlackRock has increased its fixed-income ETF client base in Asia by 25 percent this year, said Cunningham. The firm’s clients from the Asia-Pacific region put in about $3.5 billion to buy bond ETFs globally this year, according to Cunningham.

In Japan, for example, where some government bonds have negative yields, megabanks are buying ETFs to gain access to the U.S. high-grade bond market, he said.

Despite strong demand for bond ETFs, locally-listed funds have been slower to gain traction among investors. “The market for Asia-listed fixed-income ETFs has been slower to develop due to a lack of liquidity,” said Cunningham.