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Fixed-income ETF assets set to triple within three years, says iShares

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Barclays Global Investors’ exchange-traded fund arm iShares expects assets in fixed-income ETFs to grow by more than 200 per cent over the next three years, from around USD60bn at the end

Barclays Global Investors’ exchange-traded fund arm iShares expects assets in fixed-income ETFs to grow by more than 200 per cent over the next three years, from around USD60bn at the end of January to more than USD200bn, as capital market banks look to start trading the products more widely.

Today fixed-income funds account for a 7.5 per cent share of the total ETF market, having grown by 230 per cent from USD18bn in June 2005. Morgan Stanley forecasts that total ETF assets will increase from USD800bn today to more than USD2trn by 2011.

‘ETFs have traditionally been thought of as equity products, and the majority of the effort in developing and promoting ETFs has been in relation to equities,’ says iShares fixed-income portfolio manager Alex Claringbull.

‘However, fixed-income ETFs are gaining increasing acceptance amongst investors as they become educated about the convenience and transparency of ETFs. We are also seeing ETF providers placing increased emphasis on creating innovative fixed-income ETFs, such as the new iShares USD Emerging Markets Bond Fund.

‘The fixed-income ETF market is still in its infancy, and the majority of fixed-income investors still trade with the large fixed-income capital market banks. However, as the size of the ETF market grows, banks will start bringing fixed-income ETFs more to the attention of clients, which will have a major effect on the growth of the market generally and fixed-income ETFs specifically.’

According to Claringbull, many banks have not defined the best way to trade fixed-income ETFs. ‘They’re not sure whether they should be traded on equity trading desks, or whether they should be traded by fixed-income houses,’ he says.

‘The solution is likely to be twofold, with bond houses helping equity desks to source underlying liquidity in ETFs and equity desks actively trading the liquidity. As this occurs, we’re likely to see more banks look to leverage the liquidity and transparency that ETFs provide to investors, and consequently invest more extensively in fixed-income ETF products.’

Barclays Global Investors is the global product leader in exchange-traded funds, offering more than 320 iShares ETFs to institutions and individuals worldwide at the end of last year.

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