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Key takeaways

  • A surge of investor demand drove the U.S. bond ETF assets under management over $1 trillion in assets
  • Flow trends in 2020 show how bond ETFs can offer benefits to many types of investors in various market conditions
  • iShares, the world’s most comprehensive bond ETF platform, with unmatched breadth and deep liquidity, recorded numerous asset-gathering milestones this year

U.S. bond exchange traded funds (ETFs) this month eclipsed $1 trillion in assets under management, a testament to their versatility for market participants in various market conditions.1

This growth milestone is the result of many types of investors finding traditional and novel uses for bond ETFs: individual investors using bond ETFs to help seek income, active managers using them as tools in portfolio strategies designed to beat their benchmarks, and institutions such as insurance companies and pension funds using them for purposes such as liquidity and risk management. In a demonstration of growing awareness of their value, U.S bond ETFs have pulled in $152 billion in 2020, on pace for a record one-year inflow.2

U.S.-listed bond ETF assets under management (monthly, $M)

Chart: U.S.-listed bond ETF assets under management (monthly, $M)

Source: BlackRock Global Intelligence (as of Oct. 14, 2020).

A record-breaking 2020 for U.S. bond ETFs comes after global bond ETF assets under management topped $1 trillion a year ago. Now at $1.4 trillion, bond ETFs are one of the fast-growing categories in asset management.3

Bond ETFs have made it simpler for individuals and institutions to access global fixed income markets since iShares pioneered the first U.S. bond ETFs in 2002.4 Like all innovations, bond ETFs streamlined what was previously a cumbersome process by making it convenient to buy and sell bundles of bonds in real-time. Wider adoption of bond ETFs drives more trading activity, which can help decrease transaction costs and increase pricing transparency for investors. This flywheel effect helps explain why more investors are relying on bond ETFs in a variety of market conditions. Furthermore, bond ETFs represent a leap forward for fixed income markets because they help drive efficient pricing and trading of individual bonds.5

A look at flow trends during the roller-coaster market environment in 2020 underscores the benefits of bond ETFs and highlights the different potential uses for the iShares bond ETF platform.

Monthly flows into U.S.-listed iShares U.S. Treasury ETFs versus U.S.-listed investment trade and high yield corporate bond ETFs, as well as emerging markets bond ETFs (monthly, $M)

Chart: Monthly flows into U.S.-listed iShares U.S. Treasury ETFs versus U.S.-listed investment trade and high yield corporate bond ETFs, as well as emerging markets bond ETFs (monthly, $M)

Source: BlackRock Global Intelligence (as of Oct. 14, 2020). iShares USTs refers to all U.S.-listed bond ETFs that seek exposure to U.S. Treasury bonds. iShares IG, HY, EM refers to all U.S.-listed bond ETFs that seek exposure to investment grade, high yield and emerging market bonds.

iShares bond ETFs for various market conditions

At the start of 2020, financial market participants focused on tit-for-tat trade policies, the potential for a modest economic slowdown, and the strength of the longest-ever bull market for U.S. stocks.

The narrative changed rapidly as the COVID-19 pandemic triggered extreme market volatility in February and March. Amid market turmoil, investors increasingly turned to bond ETFs for clarity on what was happening in fixed income markets and to adjust their portfolios accordingly. Over that period, the iShares 7-10 Year Treasury Bond ETF (IEF), among the industry’s first bond ETFs, surpassed $20 billion in assets under management.6

A rebound in riskier asset prices followed quickly after a coordinated policy response to help stabilize financial markets. Once again, investors turned to bond ETFs to help reposition portfolios in response to evolving economic conditions. The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) surpassed $50 billion in assets under management in June, and the iShares Core U.S. Aggregate Bond ETF (AGG), which provides exposure to thousands of U.S. investment-grade fixed income securities, crossed $80 billion in July.7

Investors sought new ways to help boost income in portfolios after major central banks anchored policy rates near zero or below. In August, U.S.-listed suite of iShares iBonds® ETFs collectively surpassed $10 billion in assets under management.8 These funds hold a diversified portfolio of bonds with similar maturity dates, and for a decade they have helped income-seeking investors build bond “ladders.”

September brought renewed market volatility ahead of the U.S. presidential election. Amid increased uncertainty, some fixed income investors found opportunities to allocate to sustainable bond strategies. The iShares ESG Aware US Aggregate Bond ETF (EAGG) crossed $500 million, and the iShares Global Green Bond ETF (BGRN) crossed $100 million in assets under management.9

Summing it up

Now with a U.S. marketplace at $1 trillion, bond ETFs are a blockbuster innovation that offers potential benefits to many investors. Up-and-down market conditions throughout 2020 have provided a demonstration of their utility. Even so, at $1 trillion, U.S. bond ETFs represent just 2% of the total U.S. bond market and we believe they are poised for rapid growth over the next few years.10

Looking ahead, iShares — the world’s largest bond ETF platform — can help investors who are focused on U.S. elections and the potential for post-COVID economic recovery navigate market conditions and seek resilience, income and liquidity to their portfolios.

Steve Laipply
U.S. Head of iShares Fixed Income ETFs
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