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  • The European bond market is rapidly modernising, with new technologies and increasing “electronification” of the market.
  • Fixed income ETFs are working as an enabling technology in modernising European bond markets and becoming the tool of choice for fixed income investors.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Change is in the air

The growth and transformation of the European corporate bond market in recent years has occurred alongside a rise in electronic trading, algorithmic bond pricing and alternative trading architecture.

While this has led to improvements in liquidity, the March 2020 Covid-19 selloff highlighted continued challenges opaque bond markets present to investors. Learnings from this selloff may spur further advancements the bond market ecosystem.

As the European bond market structure continues to evolve in response to changes in regulation, technological advances and shifting investor behaviour, the influence of UCITS fixed income ETFs within the bond market ecosystem is growing.

Risk: There can be no guarantee that the investment strategy can be successful and the value of investments may go down as well as up.

Fixed income ETFs: modernising European bond markets

Investors are increasingly taking a portfolio approach to investing and risk management, drawing upon a broader ‘toolkit’. This toolkit may include individual bonds, fixed income ETFs and index-based derivatives and can be used to access liquidity and transfer risk, as well as making strategic asset allocation decisions.

Fixed income ETFs can provide certainty of execution, immediacy and price discovery even in fast moving markets as seen in the March 2020 volatility. Find out more about how fixed income ETFs behaved during the March 2020 episode in our Sending a Clear Signal paper.

The Covid-19 selloff further accelerated global institutional adoption of fixed income ETFs, as they offered real-time price discovery and cost-efficient execution, when transparency and liquidity had sharply deteriorated in individual bonds. Find out more about institutional adoption of fixed income ETFs in our Turning Point paper.

Looking ahead, we expect continued adoption of fixed income ETFs and other bond index tools, growth in electronic trading, algorithmic pricing capabilities and dramatic improvements in technology to continue to revolutionise the way investors access European bond markets.

Risk: Two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to repay the principal and make interest payments.

Fixed income ETFs – a tactical and strategic tool of choice for investors, offering:

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Increased market transparency

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Certainty and immediacy of execution

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Liquidity and price discovery

Executive summary

Read an overview about the modernisation of the European corporate bond markets and the role fixed income ETFs are playing

Download the full paper

Take a deep dive into the modernisation of European corporate bond markets and the role fixed income ETFs are playing