Central Banks Pour Assets Into ETFs

ETF Trends

Central bankers are planning on continuing to boost equity exposure via exchange traded funds. The Bank of Japan, among many others, plans to double exposure to stock ETFs over the course of the year, as falling bond yields disappoint.

Central bankers around the world have been putting direct investments into equity markets. This accounts for about $11 trillion in foreign exchange reserves, reports ETF Guide. A survey taken last month of 60 central bankers revealed that about 23% of them expect to raise their level of stock exposure, according to the Royal Bank of Scotland Group. [Global Equity ETF Technical Outlook]

For example, The Bank of Japan, second-largest holder of reserves, plans on doubling investment into the iShares MSCI Japan ETF (EWJ) to 3.5 trillion yen, equal to $35.2 billion, by 2014. In addition to the exchange traded fund purchase,  the BOJ will also buy Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at an annual pace of about 1 trillion yen and about 30 billion yen respectively. [Japan ETF Rally Still Alive as Yen Weakens]

Other central bankers that are hot on equities include the Bank of Israel, Czech National Bank and Swiss National Bank. All three have already raised equity exposure to about 10% of reserves so far. [Treasury, Dollar ETFs in Focus on Bernanke]

“In the last year or so, I have spoken with 103 central banks on diversification,” Gary Smith, London-based global head of official institutions at BNP Paribas Investment Partners, said on Bloomberg. “If reserves are growing, so are diversification pressures. Equities are not for every bank tomorrow, but more are continuing down this path.”

Bank asset managers are seeking alternatives to government bonds as the numerous rounds of monetary easing by the Federal Reserve, Bank of Japan and Bank of England have sent yields to all-time lows. The low bond returns have signaled more than half of the central bankers surveyed to take on more risk in the equities markets.

“Equities are the last asset class standing,” Matthew Beesley said in a Bloomberg interview. “When you have dividend yields in excess of bond yields, it’s a very logical move.”

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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