Displaying items by tag: ETFs

In an article for ETFStream, Theo Andrew discussed how bond market liquidity has improved in recent years due to increased electronic trading and fixed income ETFs. Bond ETFs have gone from $729 billion in assets under management to $1.7 trillion between 2017 and 2023. By the end of the decade, it’s projected to reach $5 trillion which would equate to 5% of the global bond market.

In some smaller markets, ETFs are accounting for an increasing share of trading volume. Institutions are increasingly getting comfortable with these instruments especially to manage credit risk. Trading in ETFs is also less costly than individual bonds. 

Due to increasing liquidity, there is increased price transparency and tighter spreads. It also is enabling more portfolio trading, where asset managers can automate rebalancing and quickly implement changes in the portfolio. 

Growth in portfolio trading and fixed income ETFs has been symbiotic as a deeper and richer fixed income ETF market makes portfolio trading more appealing. In turn, more allocations to portfolio trading inevitably boost inflows into fixed income ETFs. 

Finsum: Fixed income ETFs are leading to an increase in bond market liquidity. In turn, this is leading to more adoption of portfolio trading. 

According to an article by Katherine Greifeld and Emily Graffeo, Blackrock is launching its own ETF for income investors. This marks new fixed income CIO Rick Reider’s first ETF launch. 

The actively managed BlackRock Flexible Income ETF will invest in more higher-yielding parts of the fixed income spectrum like high-yield bonds, emerging market debt, and securitized assets. It will have an annual expense ratio of 50 basis points and will be managed by Rieder, Jacob Caplan, and Samir Lakhani. 

Fixed income ETFs are experiencing rapid growth in terms of inflows and new issues due to high rates and an uncertain economic outlook. Many analysts anticipate ETF flows to become a dominant factor within the fixed income market like ETFs have for equities. Within the category, Blackrock is the leader with $600 billion in assets out of a total of $1.4 trillion in fixed income ETFs. 

According to Blackrock, these ETFs are serving investors while also leading to more liquidity in fixed income markets. BINC carries an annual expense ratio of 50 basis points and is actively managed by a team including Rieder, Jacob Caplain and Samir Lakhani.

FinSum: Blackrock is the leading issuer and manager of fixed income ETFs. Recently, it launched the Blackrock Flexible Income ETF which invests in higher-yielding debt.

2022 was one of the worst years in memory for fixed income amid raging inflation and a hawkish Federal Reserve. Yet, conditions are much more favorable for the asset class in 2023 given a slowing economy and decelerating inflation. In an article for TheStreet’s ETF Focus channel, David Dierking discusses why short-term fixed income ETFs are a compelling option.

While, it’s likely that the Fed is done raising rates for now, the resilient economy and labor market mean that rates are likely to stay ‘higher for longer’. This favors fixed income with shorter maturities as investors can take advantage of high yields.

ALready, we are seeing this manifest as short-term bond ETFs were the recipient of 21% of net bond ETF inflows in Q1, even though they only account for 8% of the fixed income universe by total assets. 

Additionally, many investors treat short-term bond ETFs as a cash equivalent given that they are extremely liquid, while paying generous yields. In fact, Fed policy is essentially encouraging this trade given the extremely inverted yield curve and rally in long-duration fixed income since March of this year. 

Finsum: Short-term fixed income ETFs are seeing major inflows this year and are an intriguing option in the current market environment.

In an article for Bloomberg, Ye Xie and Liz McCormick discussed how Vanguard’s fixed income ETFs have been major recipients of inflows as investors look to take advantage of higher yields and protect their portfolio from a potential recession later this year.

In March, the funds saw $26 billion of inflows due to the crises at Credit Suisse and Silicon Valley Bank. This was nearly more than last year’s cumulative $31 billion of inflows. 

It’s also an indication that Vanguard’s passive management and indexing strategies will take on even greater significance in the fixed income world as these funds keep growing. In total, Vanguard’s fixed income funds have over $1 trillion in assets. 

It also follows what has happened in equity markets, where passive funds have ballooned in size, and make up the bulk of inflows. In hindsight, the 2008 financial crisis and subsequent few years seem to have been the trigger for equity investors favoring passive funds over active ones due to the strong outperformance of indexes. 

Similarly, 2022 was the biggest rout for bonds in decades due to inflation and a hawkish Federal Reserve. This also has led to investors rethinking allocations, and one outcome has been the growth of passive over active. 

Finsum: Similar to what happened in equities over the last decade, passive bond funds are starting to see the bulk of inflows.

In an article for iShares, Karen Veraa CFA discussed the opportunity in fixed income ETFs, following the selloff in bonds last year. She notes that assets migrated to the space as investors wanted to reduce risk in their portfolios while taking advantage of attractive yields. 

Due to the Federal Reserve’s low rate policies over the last decade, bonds were overvalued and offered paltry yields. This contributed to weakness in the asset class in 2022. But, conditions are turning more favorable as inflation has peaked, recession odds are climbing, and Fed fund futures showing increasing chances of a Fed easing cycle commencing sometime in the second-half of the year. 

While the crisis among regional banks is contributing to economic worries, the ‘flight to safety’ into bonds and fixed income ETFs was an indication that the asset class offers diversification benefits. 

Another reason to like fixed income ETFs is that opportunities to earn income are substantially higher. Between 2013 and 2021, the only place to earn more than 4% income was with riskier high-yield and emerging market debt. Now, over 70% of fixed income securities are yielding more than 4%. 

Finsum: Fixed income ETFs are particularly attractive at the moment given increasing economic worries and generous yields across the sector.