Some 37.5 per cent of sponsors believe that the taxable bond asset class of exchange-traded funds (ETFs) will see the greatest inflows from the institutional channel, according to Cerulli Associates.
“Many ETF sponsors see a heightened interest from institutions in using fixed-income ETFs over investing in individual bond securities due to the challenges of the fixed-income markets,” states Jennifer Muzerall, senior analyst at Cerulli. “While individual investors predominantly favour equity ETFs year-to-date, institutions are interested in taxable bond ETFs.”
In its most recent report, Exchange-Traded Fund Markets 2014: A Maturing Market with Evolving Opportunities, Cerulli analyses asset managers that manufacture and distribute ETFs in the US and firms that offer packaged strategies of ETFs. The report focuses on the distribution and development trends in the ETF market, including active ETFs and strategic beta ETFs, institutional distribution, marketing and staffing, and the quickly growing ETF strategist space.
“Liquidity in bond markets has seized up, making it harder to trade securities at reasonable bid/ask spreads, so many institutions are turning to fixed-income ETFs in their portfolios,” Muzerall says. “Institutions use fixed-income ETFs for both strategic and tactical purposes.
“To obtain passive exposures while constructing their core-satellite portfolio, investors may use fixed-income ETFs as changes in recent bond market conditions make it easier for firms to employ one ETF holding versus several hundred individual bond securities.”
Cerulli recommends that ETF sponsors look for opportunities in asset classes of interest for institutional investors, such as taxable fixed income, where the spread on individual securities is high so investors can take advantage of lower spreads on ETFs.