For professional investors only.
Paul Syms, head of EMEA ETF Fixed Income and Commodity Product Management at Invesco, talks to Beverly Chandler, ETF Express managing editor on the recent growth in fixed income ETFs. A broader adoption of ETFs as a vehicle combined with yields being more attractive than they have been for some time now lies behind the fixed income boost, Syms says.
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This episode is brought to you in partnership with Invesco.
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Beverly Chandler
Hello, my name is Beverly Chandler and I welcome you to our latest Off the Record: The Shorts podcast for ETF Express brought to you in partnership with Invesco. I'm here with Paul Syms, head of EMEA ETF Fixed Income and Commodity Product Management at Invesco, and we're here to talk about fixed income ETFs which have enjoyed something of a revival over the recent year. Why don't you just tell us a little bit about yourself and about the Invesco fixed income range?
Paul Syms
Paul Syms, I head up the Fixed Income and Commodity Product Management for our EMEA ETF business. It’s a business that we've been growing quite strongly over the last seven or eight years; I've been with the company for about 8 years now and we've just been building out that range. Back seven or eight years ago, we didn't have a huge presence in fixed income. We've launched a huge range of products since then covering both core fixed income exposures, government bonds, investment grade credit, some high yield. And then some more sort of targeted exposures within hybrid bond space. More recently we've launched our bullet shares range in U.S. dollar and Euro denominated investment grade credits. They're basically targeted maturities, so fixed maturity products to help investors just sort of meet their liabilities through a targeted series of maturities within the ETF world.
Beverly Chandler
Fixed income ETFs have been enjoying something of a renaissance, greater growth over last year. Can you tell me what's been driving that?
Paul Syms
There's largely two main factors within this. I think there's been just a broader adoption of the ETF as a vehicle. There's a much wider range of clients using ETFs. And then also for fixed income specifically, it's just that yields are much more attractive than they have been for some time. So maybe looking at that first part, the usage part of this, if you step back sort of ten to fifteen years, I think the primary users of ETFs were kind of the wealth managers and private banks. But over the last decade we've seen increasing usage by institutional investors. So the asset managers and the asset owners have come into this space and even some sovereign wealth funds are now using ETFs as a vehicle to access fixed income. And just the ETFs are becoming increasingly sort of that vehicle of choice to the broader range of investors right through from retail through to institutional investors. Then just looking at fixed income specifically, I think it's, as I say, it's just become a much more attractive asset class in the last couple of years. Obviously, we've been through sort of fifteen years of pretty low yields following the financial crisis and certainly we sort of hit those, those all time lows post COVID as central banks took emergency policy stance on easing to basically zero and adding to their quantitative easing programmes. So yields hit kind of all time lows during that period about five years ago. Since then, obviously we've seen a resurgence of inflation, very aggressive hiking from central banks. And now we've got to a level where yields are broadly at the best levels we've seen since the financial crisis. So I think fixed income as a its place in a multi asset portfolio is sort of much more important now than maybe it has been in years gone by. You can use it as a true sort of generator of income and also to diversify some of those risks within your portfolio that you might have from equities and the like.
Beverly Chandler
And to look specifically at Europe, given that's your area, EMEA, tell me, what do you see there?
Paul Syms
So again, I think if you look at the European fixed income ETF space, in addition to just to that broader client base and being a more attractive asset class, I think when you look at the overall European fixed income ETF space, it's largely to do with the amount of products available. You know, if you looked at again sort of a decade ago, you looked at the amount of fixed income ETFs in Europe, you probably had around 300 ETFs and they were mainly focused on core exposure, so government bonds, investment grade credits and probably quite broad asset class exposures. Since then, I think fixed income, you've seen a lot of product development, a lot of product launches over the last few years. So that number of fixed income ETFs in Europe has roughly doubled; we've got more than 600 products across the UCITS fixed income ETF market; and recently just broken through half a trillion dollars in assets under management. So again, that's sort of five times larger in AUM terms than it was a decade ago. But what you've got within that is is you've got a lot more asset classes covered and a lot more sort of granular exposure. So apart from the broad government bond exposures, you can get very targeted exposures within those for pretty tight maturity bands to allow investors to really sort of adjust their duration, interest rate, risk as per their views on the outlook. And then you've also got these other target exposures I touched on, the kind of the hybrid range that we have. So you can pick up these very niche allocations that you might not have been able to do easily prior to them being available within the ETF vehicle. Certainly if you'd like the valuation of an asset class but don't have a huge amount of expertise at picking the stocks within it, the ETF vehicle can just give you that easy access tool to allow you to take a sort of a satellite position just to take advantage of the current valuation. So I think that combination of broader client use, a broader range of products available, and just much more attractive yield levels just really seen very strong growth in the fixed income ETF market in Europe in the last couple of years.
Beverly Chandler
And you mentioned growth in defined outcome products. That was a huge trend in America, which has now arrived here in Europe. Tell me what's been your experience of that here?
Paul Syms
So again, this is really about providing investors with the opportunity to target their cash flows or target having a product that meets their liability needs a little bit more closely than they might able to do before. You know they may have been able to do it through a series of individual bonds, but that's obviously quite timely and can be quite costly to set up a whole ladder of individual bonds. With targeted maturity ETFs, basically the yield on the day that you invest is the best indicator of the annual return you're going to get over the lifespan of that product. So if you look at that, if you sort of have a something that you're saving towards in three, four or five years time, you could buy a targeted maturity ETF that matures in one of those years in three, four, five years time by investing a certain amount of money in that you know roughly what the outcomes should be if you hold that all the way to maturity, because you know the yield on the day that you're investing. So as you say, they've been popular in the US for some time. Really, the first launches within Europe happened just over a year ago. So this is sort of another space that I think works very well with the ETF vehicle rather than sort of broader, a fund vehicle. This is just a very easy access tool for investors to be able to target those maturities.
Beverly Chandler
And presumably in that case, that's almost entirely retail audience.
Paul Syms
It can be both retail and institutional. I mean it's probably more geared towards retail. However, there are asset managers that also would like to use this as a liquidity vehicle. In some ways, you know, if you're looking at this, you're getting a broad exposure to the investment grade credit market with maturities in a specific year. So potentially from an asset manager standpoint, if you want to target a specific maturity, but maybe there aren't many bonds available to buy at the time, you know you're waiting for some new issuance. You might want to just sort of use a targeted maturity ETF just to target a specific part of the curve waiting for some new issue premium to come in. So you know these could be used by the asset managers as well as retail investors. They are as you say probably more geared towards retail, more towards savings towards specific outcomes whether that's maybe saving towards a big purchase or maybe to help pay for university fees, something like that. There may be sort of ways of saving through this vehicle for retail, but yeah, can be used by both.
Beverly Chandler
We're recording this around Liberation Day as I believe it's called and that that's having its inevitable effect on the equity markets. Are you finding that the global uncertainty is driving growth into fixed income ETFs?
Paul Syms
Yes, is the simple answer. But I would caveat that. I think if we just look at ETFs more broadly, there has been an ongoing increase in demand of ETFs as a vehicle by, as I said, that broad range of investors that are now choosing ETFs as a way of accessing markets. And while we've seen very strong demand for fixed income ETFs last year, there was also very strong demand for equity ETFs and we've seen that so far this year. What I would say, potentially, is that investors are using the ETF vehicle for the liquidity and the ease of access within this sort of uncertainty. They can certainly use it for a very quick change in allocation. It allows the investor to be nimble and move their portfolio around. What we have seen, if I look at where the flows have gone in the last year or so, they've primarily been into either cash management ETFs or government bond ETFs. So I would kind of class that as investors have used them for more of the safe haven asset classes within fixed income. So now that base rates have risen to much more normal levels than they've been for the last decade or so, investors are finding just the returns on cash quite attractive. So I think that low duration now for us that may play into the bullet shares range. The fact that those targeted maturities work very well for investors and have attractive levels of yield. But just that short duration. More about income generation than necessarily about taking a view on the direction of the market has definitely been very popular. At the same time, as I say, government bonds have seen huge amount of inflows over the last year and I guess that is the uncertainty around the world. You know, we've seen increasing geopolitical uncertainties. Obviously the the Liberation Day was a big factor and we've seen a strong rally in treasuries overnight and bit of a wobble in equity markets in reaction to the broad nature of those tariffs and how widespread they are. So I think again, ETFs are just a great tool for investors to be able to change their allocation very, very quickly and get a targeted exposure to what they want.
Beverly Chandler
And then it's crystal ball time. Do you want to just take a moment and try and forecast? It's very strange here to be forecasting, but I'm going to ask you anyway. Can you give us a forecast for the rest of the year for fixed income ETFs?
Paul Syms
So it's a very tough one, as you say at the time of recording we're the day after Liberation Day so there's a huge amount of news to digest. What I would say more broadly is that investors are increasingly using ETFs for a wide variety of uses and within fixed income that can be both for their core allocation, looking to just have access to liquid core allocations, whether it's governments, investment grade credits, high yield; or to use it more in a tactical means within their portfolio, being able to be quite nimble and switch between certain asset classes to be able to react to the announcements that are happening at the moment. You also then have the ability just to run a liquidity sleeve through ETFs. So within a portfolio the use would be you could have your core allocation in certain parts of the market, but if you need to be able to deal with cash flows and the like then you can use the ETF just as a part of your portfolio, that's very easy to adjust your allocations. I think that the announcements overnight have made that a little bit more cloudy. I think you're going to continue to see safe haven assets, cash management, government bonds, probably in the near term being favoured by a lot of investors. So I think that's maybe a focus on the safe havens. But what we've seen in the last month or so, just heading into these announcements and everything else that's been going on is that obviously actually markets have had a wobble. It's been a kind of a risk off tone to markets. Within that, credit spreads have started to widen. They were trading at pretty tight levels, probably towards the tight end of the range in the last 15 years. And this risk off tone has just driven those spreads to widen. Now there will come a time when they actually do start to look quite attractive to investors and investors have, as I say, have largely been keeping some powder dry. They've been sitting in cash management ETFs getting compensated with a healthy yield on short duration cash management type products without having to take on that additional credit or duration risk within your portfolios. I think now that those spreads are widening you'll start to see as maybe we get a little bit more certainty on the outlook, slightly more attractive valuations combined with a little bit more certainty maybe about the outlook and the impact of those tariffs and the impact on global growth. I think that's when you'll start to see maybe investors starting to put some money back to work in adding risk to their portfolios, whether that’s through credit or high yield or adding some duration if they actually do feel that this is a much lower growth environment for longer, they can add to risks either through the credit market or through the interest rate market as in government bonds and the different maturities on offer there.
Beverly Chandler
Thank you to my guest today, Paul Syms, head of EMEA ETF Fixed Income and Commodity Product Management at Invesco. And thank you to you for listening. Remember to subscribe and leave a review and feel free to contact us at podcast@chandlerpublishing.com. This has been an Off the Record: The Shorts podcast from ETF Express in partnership with Invesco.
Outro
Off the Record is brought to you by ETF Express. Production by Imogen Rostron and Lisa Hynes and music by Otto Balfour. Thank you to our guests on this episode of Off the Record from ETF Express and to you for listening. We look forward to you joining us next time.
Hello, my name is Beverly Chandler and I welcome you to our latest Off the Record: The Shorts podcast for ETF Express brought to you in partnership with Invesco. I'm here with Paul Syms, head of EMEA ETF Fixed Income and Commodity Product Management at Invesco, and we're here to talk about fixed income ETFs which have enjoyed something of a revival over the recent year. Why don't you just tell us a little bit about yourself and about the Invesco fixed income range?
Paul Syms
Paul Syms, I head up the Fixed Income and Commodity Product Management for our EMEA ETF business. It’s a business that we've been growing quite strongly over the last seven or eight years; I've been with the company for about 8 years now and we've just been building out that range. Back seven or eight years ago, we didn't have a huge presence in fixed income. We've launched a huge range of products since then covering both core fixed income exposures, government bonds, investment grade credit, some high yield. And then some more sort of targeted exposures within hybrid bond space. More recently we've launched our bullet shares range in U.S. dollar and Euro denominated investment grade credits. They're basically targeted maturities, so fixed maturity products to help investors just sort of meet their liabilities through a targeted series of maturities within the ETF world.
Beverly Chandler
Fixed income ETFs have been enjoying something of a renaissance, greater growth over last year. Can you tell me what's been driving that?
Paul Syms
There's largely two main factors within this. I think there's been just a broader adoption of the ETF as a vehicle. There's a much wider range of clients using ETFs. And then also for fixed income specifically, it's just that yields are much more attractive than they have been for some time. So maybe looking at that first part, the usage part of this, if you step back sort of ten to fifteen years, I think the primary users of ETFs were kind of the wealth managers and private banks. But over the last decade we've seen increasing usage by institutional investors. So the asset managers and the asset owners have come into this space and even some sovereign wealth funds are now using ETFs as a vehicle to access fixed income. And just the ETFs are becoming increasingly sort of that vehicle of choice to the broader range of investors right through from retail through to institutional investors. Then just looking at fixed income specifically, I think it's, as I say, it's just become a much more attractive asset class in the last couple of years. Obviously, we've been through sort of fifteen years of pretty low yields following the financial crisis and certainly we sort of hit those, those all time lows post COVID as central banks took emergency policy stance on easing to basically zero and adding to their quantitative easing programmes. So yields hit kind of all time lows during that period about five years ago. Since then, obviously we've seen a resurgence of inflation, very aggressive hiking from central banks. And now we've got to a level where yields are broadly at the best levels we've seen since the financial crisis. So I think fixed income as a its place in a multi asset portfolio is sort of much more important now than maybe it has been in years gone by. You can use it as a true sort of generator of income and also to diversify some of those risks within your portfolio that you might have from equities and the like.
Beverly Chandler
And to look specifically at Europe, given that's your area, EMEA, tell me, what do you see there?
Paul Syms
So again, I think if you look at the European fixed income ETF space, in addition to just to that broader client base and being a more attractive asset class, I think when you look at the overall European fixed income ETF space, it's largely to do with the amount of products available. You know, if you looked at again sort of a decade ago, you looked at the amount of fixed income ETFs in Europe, you probably had around 300 ETFs and they were mainly focused on core exposure, so government bonds, investment grade credits and probably quite broad asset class exposures. Since then, I think fixed income, you've seen a lot of product development, a lot of product launches over the last few years. So that number of fixed income ETFs in Europe has roughly doubled; we've got more than 600 products across the UCITS fixed income ETF market; and recently just broken through half a trillion dollars in assets under management. So again, that's sort of five times larger in AUM terms than it was a decade ago. But what you've got within that is is you've got a lot more asset classes covered and a lot more sort of granular exposure. So apart from the broad government bond exposures, you can get very targeted exposures within those for pretty tight maturity bands to allow investors to really sort of adjust their duration, interest rate, risk as per their views on the outlook. And then you've also got these other target exposures I touched on, the kind of the hybrid range that we have. So you can pick up these very niche allocations that you might not have been able to do easily prior to them being available within the ETF vehicle. Certainly if you'd like the valuation of an asset class but don't have a huge amount of expertise at picking the stocks within it, the ETF vehicle can just give you that easy access tool to allow you to take a sort of a satellite position just to take advantage of the current valuation. So I think that combination of broader client use, a broader range of products available, and just much more attractive yield levels just really seen very strong growth in the fixed income ETF market in Europe in the last couple of years.
Beverly Chandler
And you mentioned growth in defined outcome products. That was a huge trend in America, which has now arrived here in Europe. Tell me what's been your experience of that here?
Paul Syms
So again, this is really about providing investors with the opportunity to target their cash flows or target having a product that meets their liability needs a little bit more closely than they might able to do before. You know they may have been able to do it through a series of individual bonds, but that's obviously quite timely and can be quite costly to set up a whole ladder of individual bonds. With targeted maturity ETFs, basically the yield on the day that you invest is the best indicator of the annual return you're going to get over the lifespan of that product. So if you look at that, if you sort of have a something that you're saving towards in three, four or five years time, you could buy a targeted maturity ETF that matures in one of those years in three, four, five years time by investing a certain amount of money in that you know roughly what the outcomes should be if you hold that all the way to maturity, because you know the yield on the day that you're investing. So as you say, they've been popular in the US for some time. Really, the first launches within Europe happened just over a year ago. So this is sort of another space that I think works very well with the ETF vehicle rather than sort of broader, a fund vehicle. This is just a very easy access tool for investors to be able to target those maturities.
Beverly Chandler
And presumably in that case, that's almost entirely retail audience.
Paul Syms
It can be both retail and institutional. I mean it's probably more geared towards retail. However, there are asset managers that also would like to use this as a liquidity vehicle. In some ways, you know, if you're looking at this, you're getting a broad exposure to the investment grade credit market with maturities in a specific year. So potentially from an asset manager standpoint, if you want to target a specific maturity, but maybe there aren't many bonds available to buy at the time, you know you're waiting for some new issuance. You might want to just sort of use a targeted maturity ETF just to target a specific part of the curve waiting for some new issue premium to come in. So you know these could be used by the asset managers as well as retail investors. They are as you say probably more geared towards retail, more towards savings towards specific outcomes whether that's maybe saving towards a big purchase or maybe to help pay for university fees, something like that. There may be sort of ways of saving through this vehicle for retail, but yeah, can be used by both.
Beverly Chandler
We're recording this around Liberation Day as I believe it's called and that that's having its inevitable effect on the equity markets. Are you finding that the global uncertainty is driving growth into fixed income ETFs?
Paul Syms
Yes, is the simple answer. But I would caveat that. I think if we just look at ETFs more broadly, there has been an ongoing increase in demand of ETFs as a vehicle by, as I said, that broad range of investors that are now choosing ETFs as a way of accessing markets. And while we've seen very strong demand for fixed income ETFs last year, there was also very strong demand for equity ETFs and we've seen that so far this year. What I would say, potentially, is that investors are using the ETF vehicle for the liquidity and the ease of access within this sort of uncertainty. They can certainly use it for a very quick change in allocation. It allows the investor to be nimble and move their portfolio around. What we have seen, if I look at where the flows have gone in the last year or so, they've primarily been into either cash management ETFs or government bond ETFs. So I would kind of class that as investors have used them for more of the safe haven asset classes within fixed income. So now that base rates have risen to much more normal levels than they've been for the last decade or so, investors are finding just the returns on cash quite attractive. So I think that low duration now for us that may play into the bullet shares range. The fact that those targeted maturities work very well for investors and have attractive levels of yield. But just that short duration. More about income generation than necessarily about taking a view on the direction of the market has definitely been very popular. At the same time, as I say, government bonds have seen huge amount of inflows over the last year and I guess that is the uncertainty around the world. You know, we've seen increasing geopolitical uncertainties. Obviously the the Liberation Day was a big factor and we've seen a strong rally in treasuries overnight and bit of a wobble in equity markets in reaction to the broad nature of those tariffs and how widespread they are. So I think again, ETFs are just a great tool for investors to be able to change their allocation very, very quickly and get a targeted exposure to what they want.
Beverly Chandler
And then it's crystal ball time. Do you want to just take a moment and try and forecast? It's very strange here to be forecasting, but I'm going to ask you anyway. Can you give us a forecast for the rest of the year for fixed income ETFs?
Paul Syms
So it's a very tough one, as you say at the time of recording we're the day after Liberation Day so there's a huge amount of news to digest. What I would say more broadly is that investors are increasingly using ETFs for a wide variety of uses and within fixed income that can be both for their core allocation, looking to just have access to liquid core allocations, whether it's governments, investment grade credits, high yield; or to use it more in a tactical means within their portfolio, being able to be quite nimble and switch between certain asset classes to be able to react to the announcements that are happening at the moment. You also then have the ability just to run a liquidity sleeve through ETFs. So within a portfolio the use would be you could have your core allocation in certain parts of the market, but if you need to be able to deal with cash flows and the like then you can use the ETF just as a part of your portfolio, that's very easy to adjust your allocations. I think that the announcements overnight have made that a little bit more cloudy. I think you're going to continue to see safe haven assets, cash management, government bonds, probably in the near term being favoured by a lot of investors. So I think that's maybe a focus on the safe havens. But what we've seen in the last month or so, just heading into these announcements and everything else that's been going on is that obviously actually markets have had a wobble. It's been a kind of a risk off tone to markets. Within that, credit spreads have started to widen. They were trading at pretty tight levels, probably towards the tight end of the range in the last 15 years. And this risk off tone has just driven those spreads to widen. Now there will come a time when they actually do start to look quite attractive to investors and investors have, as I say, have largely been keeping some powder dry. They've been sitting in cash management ETFs getting compensated with a healthy yield on short duration cash management type products without having to take on that additional credit or duration risk within your portfolios. I think now that those spreads are widening you'll start to see as maybe we get a little bit more certainty on the outlook, slightly more attractive valuations combined with a little bit more certainty maybe about the outlook and the impact of those tariffs and the impact on global growth. I think that's when you'll start to see maybe investors starting to put some money back to work in adding risk to their portfolios, whether that’s through credit or high yield or adding some duration if they actually do feel that this is a much lower growth environment for longer, they can add to risks either through the credit market or through the interest rate market as in government bonds and the different maturities on offer there.
Beverly Chandler
Thank you to my guest today, Paul Syms, head of EMEA ETF Fixed Income and Commodity Product Management at Invesco. And thank you to you for listening. Remember to subscribe and leave a review and feel free to contact us at podcast@chandlerpublishing.com. This has been an Off the Record: The Shorts podcast from ETF Express in partnership with Invesco.
Outro
Off the Record is brought to you by ETF Express. Production by Imogen Rostron and Lisa Hynes and music by Otto Balfour. Thank you to our guests on this episode of Off the Record from ETF Express and to you for listening. We look forward to you joining us next time.
