• The AUM of the iShares USD Asia High Yield Bond ETF surpassed S$1.0 billion last week. With an investment focus on more than 300 high yield bonds across Asia Ex-Japan, the ETF has generated 6.2% average annualised SGD total returns since its inception in Dec 2011.  
   
• With ~42% exposure to China Bonds and 27% to China Property Plays, the ETF has declined 7.9% in SGD terms since the end of June. On the back of the decline, the price ratio of the iShares USD Asia High Yield Bond ETF to the more globally focused iShares iBoxx High Yield Corporate Bond ETF is trading at historical lows.
   
• This has seen the iShares USD Asia High Yield Bond ETF attract net inflows of S$855 million in 3Q21. The unit price declines has also taken the trailing 12M yield of the ETF to 6.0%, which is the highest yielding ETF listed for trading in Singapore. The ETF distributes dividends on a quarterly basis.

Leading the ETF inflows in September, the AUM of the iShares USD Asia High Yield Bond ETF surpassed S$1.0 billion last week with as much as S$855 million of inflows in 3Q21. The Fixed Income ETF focuses on the performance of more than 300 high yielding corporate bonds, listed across Asia Ex-Japan, with the majority of the bonds currently maintaining yields between 1% and 8%. 

According to iShares, the Asia Credit market spans over ~680 distinct issuers and a market value of ~US$1 trillion. The High Yield segment of the Asia Ex-Japan Corporate Bond that is denominated in USD maintains a market value of ~US$300 billion, with approximately half that value contributed by high yield corporate bonds issued in China. This forms the basis of the Barclays Asia USD High Yield Diversified Credit Index which is the underlying Index for the iShares USD Asia High Yield Bond ETF. 

Since 30 June, the iShares USD Asia High Yield Bond ETF has declined 8.7% in USD terms, while the iShares iBoxx High Yield Corporate Bond ETF, with its global focus, declined 1.1%. While the performance differential is ~7%, with the 90-day volatility of the iShares USD Asia High Yield Bond ETF also at 7%, the price ratio between the two ETFs has recently traded at historical lows. On 4 Oct, the price ratio spread of the iShares USD Asia High Yield Bond ETF (US$9.26) to the iShares iBoxx High Yield Corporate Bond ETF (US$87.10), made a fresh all-time low of 0.1063. On a shorter-term basis, at 0.1063, the price ratio spread is also trading at more than two standard deviations below the 6-month mean (0.1067), with the current 6-month mean at 0.1147. The relative pricing of the iShares USD Asia High Yield Bond ETF to its global-facing peer has coincided with a surge in trading turnover and over US$600 million of inflows into the iShares USD Asia High Yield Bond ETF in September.  

The rotation to the iShares USD Asia High Yield Bond ETF has not extended to China Government Bond ETFs. The ICBC CSOP FTSE Chinese Government Bond ETF (click here for more) booked net outflows of S$18 million in 3Q21, while the Nikko AM – ICBC SG China Bond ETF SGD Class booked inflows of S$1 million.

The iShares USD Asia High Yield Bond ETF has declined 8.7% in USD terms from 30 June through to 4 Oct, with a dividend distribution trimming the decline in total return to 7.7%. In SGD terms, this represents a 7.9% price decline and a 6.9% decline in total return. 

The decline in the iShares USD Asia High Yield Bond ETF in the 3Q21, was on the back of the decline in the price of High Yield Corporate Bonds in China, particularly across the China property sector. This is because:

• As of 30 Sep, the iShares USD Asia High Yield Bond ETF carried a 42% exposure to China and a 10% exposure to Hong Kong. India and Macau exposures were 15% and 7% respectively, while across ASEAN the ETF maintained the most exposure to the Philippines at 6%, with the next highest exposures to Indonesia at 5%, Thailand at 3%, Singapore 1% and Vietnam at 1%. Other geographic exposures include Sri Lanka, Pakistan, Mongolia, South Korea and Malaysia. Non-China issuers (~58%) maintain an average yield of 5.8%.

• Within the 42% exposure to China, 65% was invested in China property play (27% of overall fund), with a direct exposure of 4.1% to China Evergrande Group (1.7% of overall fund) as of 30 Sep. The recent concerns on China Evergrande Group’s ability to service its debt obligations saw the price of the China Evergrande Group Corporate Bond declining over 70% from ~75c at the end of June to ~22c as of 30 Sep. The average price of the Corporate Bonds issued by the China property plays has also been impacted, declining from 94c at the end of June to 82c as of 30 Sep. This has seen the average yield of the China segment of the iShares USD Asia High Yield Bond ETF gain over 3% from 10.2% on 30 June to 13.3% as of 30 Sep.

• The volatility in the China Corp Bonds, on the back of the Evergrande concerns have created a dislocation in the comparative yields, which has been the primary attraction of the ETF in recent weeks, which has seen the AUM of the ETF reach S$1.2 billion. While the AUM has grown significantly from near S$150 million at the end of 2020, it is still has some way to go to be on par with the US-listed iShares iBoxx High Yield Corporate Bond ETF which maintains an AUM of more than S$25.0 billion.

Nevertheless, the iShares USD Asia High Yield Bond ETF is currently providing higher yield with historically lower volatility and more stable default rates relative to developed markets and other emerging market exposures. It targets exposure to a representative universe of more than 300 high yield bonds, thus reducing idiosyncratic risk of individual bonds. In terms of ratings, close to 43% of the portfolio is rated BB, with 30% of the portfolio rated B, with 6% rated CCC and below, while remaining 20% of the portfolio are not rated. The current yield to maturity of the ETF which holds approximately 364 constituents (as of 30 Sep) is 9.3%, based on the Bloomberg YAS yield, while the effective duration of the portfolio, which represents the change in the bond prices for a 1% change in yields, is 3.25 years.

The AUM of the suite of ETFs listed in Singapore in addition to the 3Q21 inflows are tabled below.

 ** Note the NikkoAM-ICBC SG China Bond ETF has dual class units - SGD (pay dividend) & RMB (accumulating).

Source: SGX, Refinitiv, Bloomberg (Data as of 30 September 2021)

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