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The largest and most heavily traded bond exchange traded funds (ETFs) performed a critical role during the extreme financial asset volatility experienced in the first half of 2020.

Amid the market turbulence, fixed income ETFs demonstrated that they are now integral to efficient fixed income markets.

In their biggest test to date, flagship fixed income ETFs provided deep liquidity, continuous price transparency and lower transaction costs than were available in individual bonds. The ability to buy and sell portfolios of bonds on exchange with ETFs helped investors navigate extreme price dislocations and sidestep a legacy marketplace that remains fragmented and comparatively difficult to access even for institutional investors. In many cases, institutional investors chose to use fixed income ETFs rather than fixed income derivatives.

As a result, asset owners — including pension funds and insurance companies — and asset managers immediately ramped up adoption. In recent months these large investors have increased their use of fixed income ETFs at scale, regularly with positions sized in the billions of dollars, as substitutes for individual bonds and fixed income instruments.

There is significant room for fixed income ETF asset growth as adoption by institutional investors accelerates. Global fixed income ETF assets accounted for $1.3 trillion at the end of June 2020 — growth of 30% in just one year; still, ETFs represent only about 1% of the $100 trillion global fixed income securities market.1

Bolstered by recent adoption patterns, BlackRock believes that institutional investors will help propel global fixed income ETF assets to $2 trillion by 2024.2