The exchange traded fund universe has quickly expanded, but most investors have steered toward strategies that track global equity markets, which leaves the industry an opportunity to further develop and compete for more investment money through fixed-income ETFs.
Looking ahead, BlackRock’s president highlighted the fixed-income ETF space as the next major growth area, Business Insider reports.
“One of the areas which I think is going to grow tremendously, which I think is going to catapult BlackRock into the next few years, is fixed income ETFs,” Rob Kapito, the firm’s president and co-founder, said at an investor conference on Tuesday. “We only right now cover 1% of all the fixed income that’s out there.”
The ETF space also reflects the disparity in investment attitudes toward stocks and bonds. There are currently 2,267 U.S.-listed exchange traded products on the market with close to $3.7 trillion in assets under management, according to XTF data. Digging deeper, there are only 383 U.S.-listed ETFs with $660.5 billion in assets. Fixed-income ETF assets topped $600 billion for the first time last year.
Kapito, though, argued that rising interest rates could push more investors back into the asset class after years of depressed rates caused many to favor higher-yielding equities. For example, he highlighted ETFs like the iShares MBS ETF (NasdaqGM: MBB) as a good way to focus on mortgage-based products because ETFs mitigate tax, liquidity, and transparency issues.
“If you own mortgages for your clients, and many do, they’re very complicated. You get monthly cash flows. You get prepayments when you don’t want them. They’re zip code- and pool-specific. It’s a nightmare,” Kapito said.
“I can create mortgage products in an ETF, give you one product, trades on the stock exchange, you get one dividend. It’s just a much cleaner way to express it and it’s at a lower fee than what a bid-offer spread would be. Once that starts to get out into the market, that we could do that, I think this is going to be very, very large opportunity for us.”
For more information on the fixed-income space, visit our bond ETFs category.