Institutions have been playing the exchange traded fund field through large and liquid equity offerings like the SPDR S&P 500 ETF (NYSEArca: SPY), and now these big investors are setting their sights on bond options, potentially fueling growth in a relatively overlooked segment of the ETF space.
According to Morningstar data, bond ETFs attracted $91.9 billion in net inflows over 2016, up 50% from the previous year and outpacing the rate of growth in equity ETFs, reports Gunjan Banerji for the Wall Street Journal.
The demand for debt-related ETFs continues through this year as investors funneled $34.5 billion into bond ETFs so far in 2017.
According to BlackRock iShares, the global bond ETF industry achieved its best quarter on record with $44.5 billion in inflows over Q1 2017, even with the widely anticipated Federal Reserve interest rate hike in March.
Nevertheless, bond ETF assets remain overshadowed by equity-related ETFs as growth has not matched demand for stock ETFs over the years. According to XTF data, there are 2009 U.S.-listed ETFs on the market with $2.8 trillion in assets under management. However, there are only 309 fixed-income ETFs with $472.4 billion in assets.
Supporting the ongoing growth in the bond ETF segment, ballooning block trades, which have almost doubled over the past six years and now make up 25% of the value traded in bond ETFs, signal greater institutional use of these fixed-income ETFs. These large trade orders are equal to or greater than 10,000 shares or $200,000 in value, which small mom and pop retail investors are less inclined to make.
“We like to adjust frequently,” Jon Swaney, a portfolio manager and managing director at New York Life Investment Management, told the WSJ. “Bond ETFs provide us the ability to get in and out of fixed-income markets very quickly—to dial up or down credit risk, or extend or shorten our duration.” A few years ago, “it was a relatively small percent of our portfolios, but has been growing over time.”
Similar to company shares on the stock market, bond ETFs allow investors to easily and quickly access a diverse portfolio of bonds. While bond ETFs only represent a fraction of the broader $40 trillion U.S. fixed-income market, the ease of use and convenience of the ETF wrapper have made the investment vehicle a popular trade among individual investors, and in recent years, institutional investors have caught on as well.
Sameer Samana, global quantitative and technical strategist at Wells Fargo Investment Institute, pointed out as the debt market environment changes, tehre is a growing number of investors who feel the need to diversify portfolios quickly in response to more active global central banks. Additionally, participants are prepping for a rising rate environment this year.
“Both of these trends will continue to make ETPs an integral part of the institutional (and individual) investor’s toolbox going forward,” Samana told the WSJ.
For more information on ETF flows, visit our ETF performance reports category.