iShares has published its second quarter bond ETF note showing that rising interest rates and de-risking have proven to be the biggest drivers of bond ETF activity.
Brett Olson Head of iShares EMEA Fixed income comments on bond ETF activity this quarter, observing that flow data suggests that investors used high yield ETFs, which contain significant exposure to Italian assets, to manage risk in their portfolios in the wake of the Italian election and formation of a new coalition Government.
He writes that, for example, secondary daily trading volume on the iShares € High Yield Corp Bond UCITS ETF spiked to EUR621 million in the final week of May compared to the year-to-date average of EUR321 million.
In contrast, Olson writes, Government bond ETFs are the top inflow category this year due to equity market volatility, concerns about the credit cycle and the desire to shorten portfolio duration, with the bulk of inflows seen in US treasury ETFs.
Preparing for rising rates is another key theme.
“Following greater clarity from the Fed, investors are using ETFs to position portfolios for rising rates. Floating rate bond ETFs proved to be a popular solution for investors globally – FLOT LN gathered USD297 million in AUM in Q2. In addition, the iShares Euro FRN UCITS ETF (EFRN) launched on 28th June to provide access to Euro-denominated EURIBOR floaters.
Olson also comments on the MiFID effect. Between January and June this year, 74 per cent more trading on the iShares UCITs bond ETF range was visible – where it would not have been before MiFID II came into force.
“This new visibility is helping investors become comfortable that the industry is big and liquid enough to be an efficient way to invest. iShares’ top six most traded bond ETFs in EMEA saw USD70 billion in trading volume over Q2 2018.
Olson also notes that fixed income investors are increasingly looking to integrate ESG standards into their portfolios. A report from the Principles for Responsible Investment, published in April, highlighted that “with the global bond market worth more than USD120 trillion, bondholders have the potential to become a major force in responsible investing.” The road is wide open here, Olson says.
