BlackRock’s fixed income report finds accelerated use by institutions of fixed income ETFs–

Salim Ramji, BlackRock

BlackRock’s global survey of fixed income ETFs – which is published on the 18th birthday of the first iShares fixed income ETF – reveals that global fixed income ETFs grew 30 per cent in the past 12 months, driven by increased investor appetite for liquid, transparent, and efficient access to the bond market.   

The report finds that fixed income ETF assets under management (AUM) ended June at a record USD1.3 trillion. Most of this growth (84 per cent) came from inflows: iShares alone added USD105 billion, evenly split between the second half of 2019 and the first half of 2020.  

The report’s author, Salim Ramji (pictured), Global Head of iShares and Index Investments, writes: “Most of the 30-year history and growth of ETFs has been a story of equities. But fixed income ETFs have captured the attention of some of the world’s largest investors as they continue to modernise the bond markets and increase transparency, convenience and accessibility.”

Ramji reports that wealth managers and multi-asset investors were among the first significant adopters of fixed income ETFs, observing that fixed income ETFs could help them access parts of the bond market at good value and help build better portfolios for individual investors.

“For years, both asset managers and asset owners used fixed income ETFs more at the margin — for tactical allocations or temporary exposure to a hard-to-access asset class. Some were put off by fixed income ETFs’ relative adolescence. And, while fixed income ETFs performed under various stresses over the past decade, others theorised about what might happen in the event of a true shock.”

That ‘true shock’ came in 2020 as the Covid-19 pandemic spread, rattling economies and bond markets around the world. 

“Liquidity, price discovery, usage and transaction costs were severely challenged across multiple asset classes in the bond markets, from high yield and investment grade corporates to emerging markets and even – for a brief period – US Treasuries.

“It was the long-awaited test for fixed income ETFs – they passed. Through the stresses, the largest and most heavily traded fixed income ETFs performed as our institutional clients hoped they would, by providing more liquidity, greater transparency and lower transaction costs than the underlying bond market,” Ramji writes.

When volatility struck, fixed income ETF trading surged, the report says. 

“Investors have always tended to use fixed income ETFs even more during times of uncertainty because they are efficient and effective tools for rebalancing holdings, hedging portfolios and managing risk. From late February through late March 2020, iShares UCITS fixed income ETF trading surged to USD17.5 billion on average, more than twice the 2019 weekly average of USD7.8 billion. Trading volume in UCITS high yield fixed income ETFs averaged as much as USD620 million per day in March 2020 with USD13.4 billion traded in total over the month.

“For comparison, high yield UCITS ETFs averaged USD290 million per day in 2019. The trend was similar in UCITS investment grade corporate ETFs where trading in March 2020 averaged USD1.67 billion per day, giving a monthly total of USD36.3 billion compared to USD740 million daily average in 2019.”

The report finds that record inflows in the most recent quarter – including USD57 billion into iShares – show that bond investors are increasingly using ETFs to rapidly reposition portfolios in light of changing market conditions, price individual bonds and portfolios, reduce transaction costs, manage liquidity, and hedge risk.  

BlackRock reports that institutional clients – from pensions funds to active managers – that recognised the versatility of fixed income ETFs, accelerated their adoption of ETFs. Globally, BlackRock counted over 60 pension funds, insurers, and asset managers that were first time buyers of iShares fixed income ETFs, which collectively added about USD10 billion in assets.  

“The versatility and resilience of the largest and most heavily traded fixed income ETFs, especially through market stresses this year, have made them more central to the construction of institutional investors’ portfolios,” says Ramji.

“Accelerated institutional adoption is further recognition that ETFs are modernising the bond markets by increasing overall transparency, improving liquidity, and lowering trading costs.” 

In number terms, since its inception, the industry has grown to 1,690 fixed income ETFs and USD1.3 trillion in assets. Even so, ETFs still represent only about 1 per cent of the USD100 trillion global fixed income securities market.  

However, bolstered by the latest evidence of recent adoption patterns, BlackRock believes that institutional investors will help expand global fixed income ETF assets to USD2 trillion by 2024.

“Fixed Income ETFs helped the credit markets operate better during times of market stress, including the unprecedented turmoil seen earlier this year,” says Carolyn Weinberg, Global Head of iShares Product at BlackRock. “These ETFs contributed significantly to the financial ecosystem by providing additional liquidity and price discovery, relieving pressure from the underlying bond markets at a time when that was required.” 

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Beverly Chandler
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