Bond ETFs Provide a Buffer in Volatile Markets, Says BlackRock

BlackRock (NYSE: BLK), parent company of iShares, the world’s largest issuer of exchange traded funds, said fixed income ETFs acted as expected, providing a buffer to investors, amid heightened bond market volatility following Bill Gross’ late September departure from PIMCO.

In a recent research report, BlackRock examined the behavior of the iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG) and the Vanguard Total Bond Market ETF (NYSEArca: BND), the two primary passively managed rivals to the PIMCO Total Return ETF (NYSEArca: BOND) Gross previously managed, in the wake of his departure from the firm he co-founded.

“During this time, the ETFs that we examined helped defuse uncertainty and facilitate orderly and stable markets. Rather than amplify market volatility as some have speculated, ETFs continued to demonstrate their ability to add liquidity to the fixed income markets and act as shock absorbers to high volume activity, deliver price transparency via on-exchange pricing, and allocate costs fairly as transaction costs are generally externalized from the fund and isolated to transacting investors,” said BlackRock in the report.

AGG and BND, already two of this year’s top asset-gathering ETFs, have also proven that they have in fact been prime beneficiaries of outflows from BOND, the second-largest actively managed ETF.

Since the start of the fourth quarter, only two ETFs have gained more new assets than BND and only five have seen greater inflows than AGG. The two ETFs have combined for October inflows of over $3.6 billion, a significant percentage of the more than $17 billion that flowed into bond ETFs last month. [Room for Growth in the ETF Bond Market]

Due to an increased regulatory burden, bond trading in the post-financial crisis world has seen reduced liquidity and become more fragmented, according to BlackRock. However, institutional investors are increasingly turning to bond ETFs because issuers, such as iShares, are able to source robust secondary market liquidity.

“Fixed income ETFs usage is on the rise, with over $400 billion invested in fixed income ETFs globally and one third of recently surveyed fixed income institutions planning to increase their fixed income ETF allocations in the next year,” said BlackRock.

The U.S. fixed income market has surged nearly fivefold since 2008.Between Sept. 26, the day Gross announced his departure from PIMCO, and Oct. 8, U.S. bond ETFs added $9.1 billion in new assets, according to BlackRock data. ETFs issued by BlackRock’s iShares unit, the world’s largest ETF sponsor, took in $6.2 billion of that $9.1 billion. [Investors Flock to Bond ETFs]