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Taiwan home to the world's fastest-growing ETF market

[TAIPEI] A surge in bond-buying from Taiwanese life insurers has made the island's exchange-traded fund market the fastest-growing in the world.

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

While that's only a fraction of the US$5.3 trillion pie globally, Taiwan's ETFs are also grabbing share from traditional products, with assets growing to the equivalent of 50 per cent of those held in mutual funds versus 18 per cent early last year. Unlike mutual funds, ETFs can be traded in real time. The island's 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 US credit, which yields more than domestic bonds.

An insurer is allowed to buy as much as 50 per cent of a single newly issued ETF, versus just 10 per cent of a bond mutual fund.

While each insurer can only put 10 per cent of their portfolio into ETFs, that threshold is a long way off. Insurers held NT$676 billion (S$30 billion) of bond ETFs as of May, equivalent to about 2.7 per cent 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 the island's 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.

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 per cent in May from a record US$5.6 trillion in April, a report last month showed.

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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 US$7.2 billion to the market by the end of the year. In Taiwan, insurers account for 93 per cent 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.

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.

BLOOMBERG