Strains in the global economy have placed enormous pressure on investors to seek stability, but opposing pressure has come in the form of low interest rates that can put long-term financial objectives at risk.
Fixed income exchange-traded products (ETPs) have flourished in this environment by offering price transparency, liquidity, and an ever-increasing array of exposure choices with varied risk and return characteristics, according to a new report from BlackRock.
According to the report, global fixed income ETP assets have rapidly grown to USD309bn, delivering a 10 year compound annual growth rate (CAGR) of 57 per cent. These products now account for 18 per cent of global ETP assets, up from seven per cent in 2007.
Bond ETPs are driving industry flows more now than ever before, garnering a 35 per cent share through July 2012. This growth drove ETPs to post their strongest YTD inflows in history.
Global fixed income ETP assets could exceed USD1trn in five years and USD2trn over the next decade. BlackRock believes investor appetite for bond ETPs will continue over the coming decade spurred by the income needs of ageing populations resulting in a larger allocation to fixed income assets.
The fixed income ETP market accounts for a mere 0.3 per cent of the USD98trn global bond market leaving ample room for future growth. Fixed income ETPs are only about six per cent of the size of fixed income mutual funds.
The ETP growth opportunity appears compelling in certain segments such as investment grade corporates, municipals and high yield where purchasing bonds can be more challenging due to pricing opacity and liquidity limitations.
Fixed income ETP inflows have displayed stamina through periods of rising and falling US interest rates, bolstering the case for continued growth through changing yield scenarios.
The case for continued fixed income ETP growth remains strong over the coming decade supported by demographics in developed markets and investor demand for stable sources of income. BlackRock expects more products, more investors and more fixed income ETP assets for many years to come.