This year was a record start for bond exchange traded funds (ETFs), with US$170 billion of flows pushing assets under management to just over US$2 trillion globally.
The DESK spoke to Vasiliki Pachatouridi, head of iShares fixed income product strategy EMEA at BlackRock, about how bond ETFs recently reached flow parity with equity ETFs – and why it’s not just rising bond yields that are the big attraction for investors.
According to Pachatouridi, the majority of flows right now are going into government bonds and investment grade credit as “investors prefer quality”, while still picking up yield after a long period of low interest rates.
ETFs enable investors to be nimble and reallocate at scale in these volatile markets. “This is taking place tactically but also at the core of portfolios,” Pachatouridi said.
As ETFs are still only 2% of the total bond market, BlackRock believes that the fixed income ETF market could reach US$6 trillion by the end of the decade.
Investors are currently using bond ETFs to put cash to work, de-risk and re-calibrate portfolios to the higher yielding environment. “At the same time, being in a new market regime marked by higher volatility requires a more nimble and dynamic approach to asset allocation,” said Pachatouridi. “Bond ETFs allow you to build more granular portfolios, without sacrificing liquidity of diversification.”
Additionally, bond ETFs complement liquidity in cash bonds, which has been impacted by changes in bond market structure, as well as by central banks taking a step back. And as bond ETFs trade on an exchange just like a stock, you can move risk quickly and at scale.
“Twenty years ago, before the launch of the first UCITS Bond ETF in 2003, it would have been difficult if not impossible to even imagine buying or selling instantly thousands of bonds in a single trade at a transparent price — which today is exactly what bond ETFs have empowered millions of investors to do.”
Today some of the world’s largest institutional clients are using bond ETFs thanks to their transparency, additional layer of liquidity, elevated trading volumes in times of stress and market volatility, as well as operational efficiency.
Traditionally, bonds are traded over the counter, giving relatively little transparency, while they also tend to be denominated in relatively large sizes (US$50k, US$100k). “Bond ETFs can function as an access vehicle for retail investors, allowing them to trade in a diversified bond exposure with the click of a button and in small denominations,” said Pachatouridi.
With yield levels back at attractive levels in Europe, bond ETFs can provide investors with income, while maintaining the flexibility to adapt to a changing market environment. “This further opens up a client segment that over the past few years might not have looked at the bond markets, given the low interest rate environment,” Pachatouridi believes.
Bond ETF assets under management (AUM) currently stand at US$2 trillion, with the US leading the pack with US$1.4trn AUM, followed by US$384bn in EMEA. Across regions, there are similar developments in terms of growing bond ETF liquidity, as well as further developments in the broader ETF ecosystem.
“In EMEA we see a stronger adoption of sustainable UCITS bond ETFs, with US$75bn of AUM currently following sustainable index strategies. Globally we also see increasing demand for fixed maturity ETFs, which offer investors regular income as well as a pull to par profile similar to cash bonds,” concluded Pachatouridi.
©Markets Media Europe 2023
