BlackRock’s iShares reports that January saw USD16.6 billion of net inflows into global bond ETFs, the most since USD18.3 billion in February 2015 as flows remain resilient to rising rates in the US.
Globally iShares captured USD7.8 billion, concentrated in investment grade corporates, US Treasuries and EM debt as investors positioned for the reflation trade. The firm also reports that 2016 welcomed more than 100 new users of iShares bond ETFs in Europe.
Another development in the ETF arena, reported by iShares, is that the bond ETF options market in the US grew by 72 per cent year over year, which iShares says further improves the liquidity profile of many ETFs. This shows existing bond ETF users continued to embrace ETFs as part of a new set of investment tools, and not just as a fund, the firm writes.
Bond ETF option open interest has grown to a notional value of USD50 billion (as of 16/12/16) in the US. While this application of ETFs is still nascent in Europe, this is a growing area of interest, iShares says.
Across sectors, the largest bond ETF option markets are high yield and government bonds, while historically, the majority of bond ETF options trades were for downside protection. The firm writes that today they are seeing clients use ETF options for a much wider range of applications from expressing outright views on volatility, to risk reversals and cross-sector volatility trading.
2016 marked the point that the global bond ETF industry crossed USD600 billion in assets and the European bond ETF market crossed USD150 billion
Looking ahead to 2017, iShares believes that the fixed income industry is ripe for disruption. “The traditional methods of trading and building bond portfolios are outdated, and this requires investors to think differently. We expect bond ETFs to become more engrained as the tool investors – from funds buyers to bond buyers – look to form part, or in many cases the basis, of their bond allocations.
“The global drive towards fee-based investment will continue to encourage investors to adopt a ‘value for money’ mentality, which we expect will in turn drive greater interest and use of ETFs among advisers, wealth managers and individuals.
“Providers will continue to broaden the palette – to provide investors with even more choice in achieving granular exposure in their bond allocations. For example through smart beta fixed income and funds with an Environmental, Social and Governance (ESG) tilt.”