The extreme market volatility in the early days of the pandemic has led to increased adoption of fixed income exchange traded funds among both wealth managers and institutional investors. As a result, the assets under management for global fixed income ETFs will triple to $5 trillion by 2030, according to new research from BlackRock.
The fixed income ETF market has grown 23% annually into a $1.7 trillion industry with more than 1,400 products. Still, bond ETFs comprise just 2% of the $124 trillion in all fixed income assets.
“Bond ETFs have revolutionized fixed income investing as they provide instant access at transparent prices to hundreds of bond market exposures in ways that are accessible to all investors,” said Salim Ramji, global head of ETF and index investments at BlackRock, in a news release announcing the paper.
Added Ramji: “Bond ETFs have grown by proving to be useful and resilient investment tools during various market conditions including near-zero interest rates, pandemic-related market stresses and inflationary pressures.”
BlackRock has identified four trends that should drive increased adoption of fixed income ETFs:
Building Blocks in Evolved 60/40 Portfolios
Bond ETFs’ market share in the fund industry is 24%, compared to 14% five years ago, as more investors are blending bond ETFs with active strategies, moving from one type of fixed income exposure to another, reframing the traditional 60/40 portfolio and bond construction in the process.
Tools for Seeking Active Returns
Institutional investors are among the fastest-growing adopters as they turn to bond ETFs to adapt their portfolios to changing market conditions, price individual bonds and portfolios, reduce transaction costs, manage liquidity, and hedge risk. Recent regulatory changes in the U.S. have also put bond ETFs on a more level playing field with individual bonds, allowing U.S. insurers to use ETFs more freely.
Increasingly Precise Sources of Potential Returns
The number of bond ETFs available to trade has doubled since 2015 with the industry expanding investor choice from tracking broad market segments to providing more targeted exposures by region, credit risk, or maturity to offering advanced strategies that incorporate active management.
Catalysts for Modernizing Bond Markets
Since the global financial crisis, the growth of fixed income ETFs has driven advances in electronic trading and algorithmic pricing of individual bonds. Electronic trading volumes in U.S. investment-grade bonds at the end of March accounted for 36% of total traded volumes for those bonds, up from 21% in early 2019. Meanwhile, electronic trading volumes of European corporate bonds grew 61% between 2017 and 2020.
“The global bond ETF industry is growing faster than we expected, propelled by self-reinforcing and enduring adoption trends from our clients during the pandemic era,” Carolyn Weinberg, global head of product for ETF and index investments, added. “We believe that the next wave of growth is just beginning.”
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