ASX bond ETFs not far away ASIC approval could be before year end

By Vishal Teckchandani
Mon 19 Sep 2011
ASX hopes to see fixed income ETFs before year end.

Fixed income exchange-traded funds (ETF) could hit the local market by the end of year if changes to the Australian Securities Exchange's (ASX) AQUA market rules gain ASIC approval.

Under the ASX's current AQUA market rules, only equities, currency and commodities-based ETFs could be quoted on the exchange, but not fixed income products, ASX AQUA and warrants manager Stephen Small said.

"We have been working closely with ASIC in order to change the ASX AQUA market rules so that fixed income ETFs could be quoted on the ASX," Small said.

"The wording of the new rules is close to final, however, still needs ASIC's final approval. We hope to get approval by the end of calendar year 2011 so we can work with issuers in order to have fixed income ETFs quoted on the ASX."

The ASX AQUA market is a rule and market framework designed specifically to allow the quotation of managed funds, ETFs, exchange-traded commodities and structured products on the ASX.

Small said the rules proposed by the ASX would allow providers to list Australian or international government, semi-government and corporate bond ETFs.

Fixed income accounted for about $232 billion of $1.39 trillion invested in ETFs globally, according to asset manager BlackRock.

ETF take-up in Australia had grown 70 per cent annually over the past three years to nearly $5 billion in assets, Tria Wealth Management said in April.Small said there was significant demand among investors for fixed income ETFs and it was no secret major issuers were considering launching bond ETFs as part of their product suite in the future.

"We are aware of providers looking to build an ETF tracking the UBS Composite Bond Index, which is a common bond benchmark in Australia and one used by many unlisted managed funds," he said.

Vanguard head of product management and development Robyn Laidlaw said bond ETFs could benefit self-managed superannuation funds (SMSF) in particular because they offered ease of access, diversification and tended to charge low fees.

"We think the SMSF sector will also be increasingly seeking retirement income solutions, so fixed income ETFs could potentially play a role there," Laidlaw said.

ETFs listed overseas, such as the SPDR Barclays Capital Short Term Corporate Bond, Vanguard Short-Term Government Bond Index and PIMCO 1-5 Year US TIPS, charged fees ranging from 13 to 20 basis points, according to Morningstar.

However, the key difference was that ETFs offered much greater transparency, Morningstar co-head of fund research Tim Murphy said.

Russell Investments ETF business and product specialist Bronwyn Yates said bond ETFs would allow financial advisers and investors to build fully diversified portfolios by using the low-cost solutions.

"We anticipate that we will also see interest at the dealer group level from a model portfolio perspective," Yates said.

ASX sees strong pipeline of bond ETFs

Exchange is in talks with all major providers

By Wouter Klijn
Mon 16 Jan 2012

The ASX expects to see the first fixed-income ETFs in about four weeks.

The Australian Securities Exchange (ASX) expects to have at least 10 fixed-income exchange traded funds (ETFs) listed in the first half of 2012.

"In the first half of this year, we expect to see 10 plus [products] approximately," ASX AQUA and Warrants manager Stephen Small said.

On Monday 9 January, changes to the ASX operating rules came into effect that allowed for fixed-income AQUA products, including ETFs, to be listed.

Before the change in operating rules, ETFs could only include listed securities.

This excluded most fixed-income products because they are traded over the counter.

Providers can now officially launch their application for new products, Small said.

"All issuers are in discussions with us around applications for these products. We are in the process of processing those applications," he said.

"We would like to see ETFs quoted within the next four to six weeks. That is a realistic time frame."

In a circular to the market, the ASX explained that fixed-income ETFs can include both sovereign and corporate debt, but holdings will initially have to be selected from either the UBS Composite Bond Index or the S&P/ASX Australian Fixed Interest index.

Providers can also include any government or semi-government products for which there is enough reliable information to determine a price.

But Small said the rules did not restrict providers to using just those indices and there is the ability to apply for approval of custom products.

"We are almost pre-approving those two indices. Now, that doesn't restrict ETF providers from using [other] indices. [But] other indices will take a bit longer," he said.

Vanguard is one provider in discussions with the ASX to list new products.

"We have been considering what our product offer will be in this space and now that the rules have been changed, we are able to progress with the product development process," a Vanguard spokesperson said.

"In considering what products to offer, we have looked at the needs of our clients across SMSFs (self-managed super funds), direct investors and their advisers and institutions, and what I can say is that any product offer we will make will reflect our philosophy of offering investors low cost, tax effective and diversified index products suitable for a range of investors."

iShares also said it was delighted with the new rules.

"We look forward to meeting client demand by offering fixed income ETFs and complementing our existing popular range of international and Australian equity iShares," iShares Australia managing director Mark Oliver said.

The change of operating rules also allows for ETFs to contain a combination of debt and equity, Small said, which would make the listing of model portfolios or balanced fund type products possible.

"There is nothing that prevents you from doing that. [But] I have not had any discussions around those type products at this stage," Small said.