"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 totaled $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, Mr. Cunningham said in an interview. The previous three years have consistently been skewed toward institutional investors taking 70% and the remaining 30% 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 ETFs. Globally, fixed-income ETFs have seen net inflows of $129.4 billion this year through the end of September, a 22% increase from the same period last year, according to Morningstar 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% this year, said Mr. Cunningham, who is based in Hong Kong. The firm's clients from the Asia-Pacific region put in about $3.5 billion to buy bond ETFs globally this year, he said.
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 Mr. Cunningham.