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Fixed income ETFs see assets rise in transformative year

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Extreme volatility in the world’s asset classes in early 2020 saw fixed income ETFs emerge covered in glory. Salim Ramji, Global head of iShares and Index Investments at BlackRock published the firm’s fixed income report in July saying: “Liquidity, price discovery, usage and transaction costs were severely challenged across multiple asset classes in the bond markets, from high yield and investment grade corporates to emerging markets and even – for a brief period – US Treasuries.

“It was the long-awaited test for fixed income ETFs – they passed. Through the stresses, the largest and most heavily traded fixed income ETFs performed as our institutional clients hoped they would, by providing more liquidity, greater transparency and lower transaction costs than the underlying bond market.”

Fixed income ETF trading surged through the volatility partly because investors tend to move to fixed income in times of uncertainty and also because of their trust that fixed income in ETF form would be able to hold up as efficient and effective tools for rebalancing holdings, hedging portfolios and managing risk.

From late February through late March 2020, iShares UCITS fixed income ETF trading surged to USD17.5 billion on average, more than twice the 2019 weekly average of USD7.8 billion. Trading volume in UCITS high yield fixed income ETFs averaged as much as USD620 million per day in March 2020 with USD13.4 billion traded in total over the month.

“For comparison, high yield UCITS ETFs averaged USD290 million per day in 2019. The trend was similar in UCITS investment grade corporate ETFs where trading in March 2020 averaged USD1.67 billion per day, giving a monthly total of USD36.3 billion compared to USD740 million daily average in 2019,” Ramji says.

At a recent Morningstar Investment Conference, BlackRock chief executive Larry Fink said: “We’re seeing more and more active investors using ETFs for active management. They go in and out of passive exposures through ETFs, and the biggest transformation of that is in fixed income. The fixed income market will be substantially more of an ETF market in the future.”

Currently, actively managed bond ETFs represent nearly one-tenth of the USD1trillion market, according to ETF.com. The actively managed bond sector has enjoyed 13.4 per cent, or USD20.4 billion of the USD152 billion that has come into fixed income ETFs.

Back to that market turmoil in March, and the US Federal Reserve put its faith in ETFs, announcing that as part of its measures to steady the financial markets, it would be buying investment grade credit ETFs. This validation and the smooth operation of fixed income ETFs have encouraged assets to rise.

The great search for yield in a near-zero environment and the efficiency of actively managed fixed income ETFs has also attracted investors. The fixed income ETF world is becoming increasingly sophisticated with its offerings, actively picking and choosing among bonds to produce specific returns, aimed at investors who need yield in a low yield world. 

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