While increased demand and improved technology have laid the groundwork for a wider range of fixed income ETFs, fixed income ETFs have lagged in growth compared to equity ETFs. Fixed income ETFs account for only 17% of all ETFs, with the majority being equity ETFs.
The low representation of fixed income among ETFs exists even though the bond market has rapidly grown while the U.S. equity market has been shrinking. This suggests a potential for the development of additional fixed income ETFs.
Institutional adoption of fixed income ETFs has grown as these investors increasingly use ETFs as tools for quickly changing exposures when the market is volatile, and for hedging and managing liquidity.
Most actively managed fixed income funds continue to underperform their index benchmarks. Some bond market asset allocators manage the weighting of different major fixed income asset classes such as government bonds, mortgage-backed securities, high-grade corporates, high-yield corporates, and emerging market sovereigns, against broad fixed income benchmarks. These areas of the market are already well-represented by bond indexes and broad-based fixed income ETFs that follow them.
What’s missing is more precise exposures among fixed income ETFs. Current fixed income ETF offerings generally leave out the subtleties of maturity categories, credit quality, and industry sectors, which are areas of consistent focus by most institutional bond and risk managers.
BondBloxx, an issuer specializing in fixed income ETFs, is introducing an array of more precise bond market exposures through seven high-yield sector funds. These targeted ETFs are designed to offer increased options for investors looking to manage risk more effectively within their portfolios.
BondBloxx selected the high-yield market for its introductory ETFs for a couple of reasons. For one, high-yield returns tend to be less dependent on interest rates among the major bond asset classes, as credit quality dominates in high yield. For another, the high-yield market resembles the equity market most closely in overall volatility and sector performance differentials.
But unlike equities, high-yield investors sacrifice liquidity to participate on a security level. BondBloxx believes that adding high-yield sector ETFs can enhance liquidity and broaden the access to the HY market by creating more specific ways to own segments of the high-yield market.
The new ETFs are based on the ICE BofA US Cash Pay High Yield Constrained Index. Seven custom indexes were crafted from the 20 ICE Sub-Sector Indices.
According to the issuer, more institutional investors are acknowledging the role that fixed income ETFs can play in their portfolios, even during times of volatility. They can offer short-term liquidity while offering a more efficient way to keep portfolios in balance. Sector ETFs enable intentional tactical tilts to their portfolios. They can also enhance price discovery, even when transparency is low, or the underlying securities are not trading.
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