“We’d like bond ETFs to be as ubiquitous as bonds and bond futures,” Small said.
Small pointed out that 10-year Treasury futures – one of the most widely used securities by professionals – trade about $146 billion per day. Bond ETFs, on the other hand, trade around $6 billion per day, or 4% of the volume of those Treasury futures. Small argued that this opens up a big opportunity for the ETF industry, especially as more professional investors put money into bond ETFs in the future in response to the shift toward electronic trading, a shift that occurred in the stock market side a decade ago.
“Bond investors still pay a lot of money for the market, many still pay a 1 percent fee,” Small said, explaining that electronic trading will make the market more efficient, less expensive and will open up even more opportunities for lower-cost ETF providers.
Related: A New ETF That Tries to Outperform the S&P 500 as Rates Rise
Regulatory changes could also support the bond ETF industry, with new regulations coming into effect in April 2018 that will require disclosure of bond markups.
“People who are charging a 1 percent commission are going to have to explain why that is a better deal than owning a bond ETF,” Small said.
For more information on the fixed-income market, visit our bond ETFs category.