While ETF popularity continues to grow, education remains key. Some advisors and investors use ETFs along with mutual funds or individual securities. Meanwhile, others gain exposure to an investment style without an ETF.
Leveraging the State Street Global Advisors 2024 ETF Impact Study, VettaFi wrote how there’s more room for ETF adoption. In the study, 55% of individuals were not using ETFs and 30% of financial advisors were only sometimes or rarely recommending ETFs to their clients.
In a separate survey of advisors during our Q3 Fixed Income Symposium, VettaFi asked “How are you investing in fixed income?”
The most popular answer was ETFs (78%). This should be less of a surprise since we marketed the virtual event on our ETF Trends website and featured fixed income ETF managers. However, it was enlightening to see that mutual funds were used by 54% of the respondents. Individual bonds were utilized by 38%.
We will focus on the individual bonds this time. VettaFi has recently highlighted the wide range of active ETFs that offer an alternative to mutual funds.
Diversification is a Top Priority for Investors
Diversification was the top reason individual investors use ETFs according to the State Street Global Advisors study. Spreading around should matter to equity investors. Yet, it might be even more important for fixed income investors seeking capital preservation or stable income.
For some investors, the reason to buy a corporate bond issued by Apple or Verizon is precision. They can pick a bond maturity in 2028 and have relatively high confidence these investment-grade issuers will meet the interest payments before the bond is paid in full.
However, the shareholders of the Invesco BulletShares 2028 Corporate Bond ETF (BSCS ) and the iShares iBonds Dec 2028 Term Corporate ETF (IBDT ) have the same expectations. These ETFs own several hundred bonds maturing in four years issued by companies with similarly strong credit profiles. The $2.0 billion IBDT and the $1.8 billion BSCS provide diversification benefits as well as monthly distributions not semi-annual ones.
Taking on Added Credit Risk
Some investors might be willing to take on some additional credit risk through a BB-rated bond issued by Royal Caribbean Group or Sirius XM Radio. Such bonds sport higher yields to compensate for the higher likelihood of default.
The BondBloxx BB-Rated USD High Yield Corporate Bond ETF (XBB ) provides targeted exposure to the speculative-grade rating category. The $60 million ETF owns bonds from more than 400 issuers, including Royal Caribbean and Sirius XM Radio, spreading around the risk.
Meanwhile, fallen angel ETFs offer a slightly different way of gaining BB bond exposure. For example, the VanEck Fallen Angels High Yield Bond ETF (ANGL ) has 72% of its assets in BB rated bonds that previously were investment-grade rated. The remaining assets of the $3 billion fund are primarily in bonds rated lower than BB. The iShares Fallen Angels USD Bond ETF (FALN ), a peer $1.7 billion fund, has 78% of its assets in bonds rated BB. These were both much higher than the 50% stake found in the iShares Broad USD High Yield Corporate Bond ETF (USHY ).
Individual bonds are often used to complement a broad market index-based ETF like the Vanguard Total Bond Market ETF (BND ). Yet, there are a lot of strong ETF tools to build a portfolio with greater precision.
For more news, information, and analysis, visit VettaFi | ETF Trends.
