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If sourcing a single bond for a portfolio is challenging, try doing it a thousand times. Enter the ETF.

I recently spent a whirlwind day in New England, meeting with more than 30 iShares clients. It was an eye-opening and gratifying experience. Collectively, these clients represent a cross-section of financial planning and investment management businesses, from registered investment advisors to CIO’s of large asset managers that deploy iShares ETFs for tactical allocations, individual security replacement and other uses.

What struck me as I talked with these men and women was that despite the differences in their business models, they had many objectives in common. In one way or another, they were looking to:

  • Achieve investment outcomes such as income, sustainability and risk reduction
  • Customize and scale portfolio construction
  • Access quality products that had delivered what they promised
  • Provide value for their own clients

Fixed income ETFs are playing a crucial role in helping these professionals fulfill their goals. The numbers tell the story. Fixed income ETF assets have increased eight-fold since 2008 and passed $1 trillion globally this past June; year to date, investors have added more than $200 billion across markets. Fixed income represents one of the fastest-growing ETF segments – a trend we see continuing for some time.

Fixed income ETF assets by all issuers¹

Fixed income ETF assets by all issuers

A tech evolution

There are two forces at work here. The first is market-driven, as investors turn to bonds for portfolio resilience in an uncertain market. As a result, we’re seeing robust flows into ETFs such as iShares 20+ Year Treasury Bond ETF (TLT) for equity diversification, and Shares iBoxx High $ Yield Corporate Bond ETF (HYG) for income potential as yields stay stubbornly low.

The second and more long-lasting driver of fixed income ETF growth is technological, as is the case for so many features of our lives. (Could we ever have imagined carrying "1,000 songs in our pockets"?) Consider what it once took to assemble a diversified portfolio of mortgage-backed securities: the laborious and costly process of sourcing each security in the over-the-counter market; evaluating the creditworthiness of thousands of underlying mortgages; managing prepayment and other risks; and all the while reinvesting monthly or quarterly coupon payments and principal as bonds matured.

Today, investors can access all of that in a single transaction. iShares MBS ETF (MBB) serves up a managed “playlist” of 1,600+ securities, in a wrapper that’s transparently priced and as easy to buy and sell as a stock; income and principal can be automatically reinvested. And the cost? MBB has a management fee of 0.07%, or 70 cents for every $1,000 invested. It’s this type of convenience that has led individuals, advisors and institutions to transition from individual bonds to fixed income ETFs.

There are knock-on benefits as well. As with other robust technologies, ETFs have jumpstarted a virtuous circle of uses and benefits. The growing presence of ETFs has rapidly accelerated changes in the bond markets in which they operate, in turn helping to increase liquidity, efficiency and transparency for all investors.

Armando Senra
Head of iShares Americas, BlackRock
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