Key ETF Investment Trends
The most innovative changes in the fixed income ETF industry have arisen not from product providers, but from bond investors finding new ways that ETFs can help improve investment results. Some of the key reasons fixed income ETF usage is on the rise include:
ETFs are liquid capital markets tools
Investors have turned to ETFs to bridge the liquidity gap as bond markets have evolved.
Central bank policies and increased regulatory standards have changed the fixed income investment landscape. As a result, corporate bond market liquidity, as measured by both trading volumes and average trade size, has been declining. Post-financial crisis legislation has further led to a reduction in the amount of capital that traditional liquidity providers commit to supporting secondary bond trading.
- Large, liquid, fixed income ETFs can be an ideal tool for institutional investors that require an additional source of liquidity when trading conditions in the bond market deteriorate.
- When bond markets are stressed, fixed income ETFs effectively provide an additional trading venue—the exchange—where shares can be transferred among investors without needing to navigate an illiquid bond market.
- In this way, holding an ETF in a bond portfolio can act as a liquidity shock absorber by providing an active and transparent trading vehicle when cash bonds cannot be easily transacted.
- Many iShares Fixed Income ETFs have sufficiently long track records, assets, and liquidity to be used by institutional investors.
ETFs can help investors adapt to changing rate environments
Investors are using fixed income ETFs to tactically manage their portfolios
With global interest rates hovering around historic lows, many investors have become concerned about the impact of a prolonged rising rate cycle on their fixed income portfolios.
- Investors are exploring ETFs as a flexible and simple way to dynamically adjust duration in their portfolios in a single trade.
- iShares ETFs allow investors to select a precise mix of duration risk, yield potential, and credit quality to implement their investment views.
- iShares offers a variety of short maturity ETFs including floating rate, multi-sector, corporate, government, and even interest rate hedged fixed income exposures.
ETFs unlock global fixed income opportunities
Investors are utilizing ETFs to trade bonds in foreign markets
ETFs democratize access to the world’s bond markets and can help break down the barriers investors face when investing internationally.
- Adding international exposure through ETFs has the potential to increase yield without assuming high levels of duration, which would be associated with similar-yielding domestic bonds.
- The inclusion of uncorrelated assets may reduce volatility and increase return potential for the overall portfolio.
- iShares offers a variety of exposures including US and local currency, developed and emerging markets, and government and corporate bonds.