Most fixed income ETFs track market indices that follow targeted segments of the markets, such as US Treasury, high yield, or emerging market bonds. Institutional investors primarily use fixed income ETFs as core long-term investment holdings, tools for targeting precision exposures, and as financial instruments that serve as substitutes or complements to derivatives.
According to Greenwich Associates, institutions are employing ETFs because they are "easy to use", offer "liquidity", and can have "lower trading costs vs. cash bonds".
Institutional investors are recognizing the strategic role fixed income ETFs can play in bond investing. Here's why.
ETFs enable a variety of broad and targeted exposures
|Fixed income ETFs give you access to hundreds of cash bonds in a single trade, and enable you to create highly customized solutions by targeting specific fixed income sectors. With ETFs, you can increase or decrease exposures to target sectors more quickly than you could otherwise do in the OTC bond or derivative markets.
|Disaggregate Barclays Agg|
ETFs can offer an additional source of liquidity for fixed income investors
The growth of the fixed income ETF market has helped create a new source of liquidity for bond investors, above and beyond what you can access in the OTC market. With fixed income ETFs, you effectively get an additional trading venue—the stock exchange—where shares can be transferred among investors without relying on the OTC market.
|See ETF trading volume|
ETFs may provide bond investors with significant cost savings
iShares ETFs generally offer price improvement, making the ETF less expensive to trade than a comparable portfolio of bonds. Relative to a basket of bonds, ETFs offer the benefit of on-exchange liquidity, which often results in lower transaction costs.
|See bid offer spreads|
ETFs help overcome the challenges of the OTC market
Because ETFs are traded on a centralized exchange, they allow investors to see execution prices throughout the day. With ETFs, fixed income investors have full transparency into trading volumes, pricing, and transaction costs, making them valuable tools for navigating stressed markets.
|See Marketplace Comparison|