BlackRock reports global bond ETFs going strong in 2017

Stephen Cohen, Head of Fixed Income Beta at BlackRock writes that the global bond ETF industry achieved another strong quarter with USD43.3 billion inflows in Q2 2017, just short of the industry record set in Q1 2017 when the products attracted USD44.5 billion in assets.

Globally, iShares captured USD21 billion in Q2, driven by investor appetite for investment grade credit, emerging market debt and government bond funds, Cohen reports.

Driven by the search for yield, global emerging market bond ETFs saw USD7.5 billion of net inflows in Q2. Cohen writes that similar to Q1, while US investors preferred hard currency debt, European investors invested in both local and hard currency debt. “This trend has tailed off at the start of Q3 as investors may be reducing allocations in reaction to recent central bank comments and increases in Treasury yields.

“Globally through 2017 we’ve seen strong demand for dollar-denominated debt. Amongst European investors, June however saw strong demand for Euro investment grade corporates as the French election result appears to have reduced concerns around European political risks. Even hawkish rhetoric from Mr. Draghi at the end of June failed to shake the positive picture for Euro IG.”

Cohen notes that investors have become inventive – building on the role of ETFs as a broad market access tool, many investors are seeking new ways and contexts to apply ETFs, he says, citing:

o   Lending out ETFs units to earn incremental revenue and make portfolios work harder
o   Combining ETF positions with derivatives to achieve targeted exposures e.g. using interest rate futures to hedge the rate risk in a broad corporate bond ETF, creating exposure to credit spreads
o   Increased use of options on ETFs e.g. investors adding options on ETFs to portfolios as hedges for potential volatility.

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