BlackRock’s fixed income team, headed by Heather Brownlie (pictured), has predicted that bond ETFs are on pace to hit USD1.5 trillion by 2022.
They write that total bond ETF assets stand at USD750 billion with Q3 flows driven by investment grade corporates (USD9.4 billion), Treasuries (USD7.0 billion) and multi-sector fixed income (USD5.8 billion).
The evolution of the broader fixed income market continues to drive ETF adoption. Remarkably steady growth at above-trend rates is fostering subdued market volatility, driving investor appetite for risk assets, the firm writes.
“In Q3, investors favoured USD assets, notably investment grade corporates, treasuries and multi-sector fixed income exposures. US high yield was also back in demand (USD4.9 billion).
Another trend that the firm has identified is that emerging market debt flows are increasing, post the annual summer slowdown. “EMD has been a strong driver of bond ETF flows this year [USD16 billion YTD], driven by the search for yield. Both local and hard currency exposures continued to gather inflows in roughly even proportions in Q3. European-based investors drove demand for hard currency exposures, while local currency funds attracted US and European investors alike – a noteworthy shift from earlier in the year when US investors heavily favoured hard currency exposure.”
However, BlackRock’s fixed income team also urges investors to not forget the importance of diversification. “The brief August sell-off driven by macro risk concerns around North Korea were a helpful reminder for some investors to pay attention to rates exposure in their portfolios. While we saw significant inflows into treasury-based ETFs (USD6.5 billion), inflation in the US will be key to the policy and market outlook. We prefer TIPS over nominal treasuries given the challenges a sustained economic expansion pose for treasuries, and valuations look more favourable amid weaker inflation prints.”