Passive fixed income inflows have accelerated in recent years, yet the category still trails passive equity strategies in terms of market share and adoption. Over the last decade, passive equity funds have become the dominant way in which investors get exposure to equities. Currently, passive equity funds account for 45% of global funds, while fixed income accounts for 24%. In terms of the global market, passive equity funds account for 19%, while passive fixed income comprises just 2%.

S&P Dow Jones Indices anticipates that we will see increased adoption of passive fixed income strategies over the next decade, similar to how passive took over the equity landscape. Already, inflows and market share of passive fixed income strategies are growing at a faster rate than equities. 

It should be noted that bond index funds in ETF form didn’t arrive until 2002, while equity ETFs launched in 199 and there are a limited number of fixed income benchmarks relative to equities. It’s also more difficult to replicate a bond index given that they tend to have thousands of securities, higher trading costs, more turnover, and require higher levels of oversight given maturation dates, defaults, credit rating changes, and new issues. Overall, it requires about 10 times more trades to track a fixed income benchmark than an equity benchmark. 

Finsum: Passive fixed income flows have accelerated in the last couple of years due to attractive yields. Here’s why some see the category exploding over the next decade, similar to passive equities, and what’s held it back.