Bond ETF Segment Has More Room to Grow

The exchange traded fund universe has enjoyed decades of growth, but the bond ETF segment has been largely overshadowed by its equity ETF counterpart. However, things could change as more investors adopt fixed-income-related ETFs.

While many have witnessed the rapid growth of the ETF industry, ETFs are still only a very small part of the U.S. equity and bond businesses, making up 1% of the $49 trillion bond market and 8% of the $26 trillion stock market, reports Bob Pisani for CNBC.

However, the industry is quickly changing. Martin Small, head of iShares America, projected that the ETF business could eventually grow to 50% of the U.S. stock market form the 8% today, and it is only a matter of when. On the fixed-income side, Small estimates the business could double or even triple in the next five years as bond ETFs grow to $1 trillion to $1.5 trillion in assets under management, or less than 5% of the total bond market.

ETFs’ success story has been attributed to their cheap and efficient ability to provide broad market exposure.

“People have come to understand the merits of index investing: you keep more of what you earn,” Small told CNBC.

Looking ahead, some of the biggest ETF providers, such as BlackRock, Vanguard and State Street, are eyeing institutional investors like sovereign wealth funds, university endowments and professional asset managers as potential big money investors to increase demand for bond ETFs.