The increased participation of large institutional investors in the bond exchange traded fund market could help improve liquidity and diminish fixed-income ETF trading costs for all participants.
Adam Gould, head of equities at Tradeweb, calculated that fixed income made up half of all transactions with a notional value of more than $5 million on its institutional U.S. ETF platform over the first quarter of 2022, or up from 36% for the same period last year, the Financial Times reports.
The high-value trades can be an indirect indicator of increased activity by large institutional-sized investors.
Tradeweb also noted that the number of clients executing fixed income ETF trades on its institutional platform rose by over 20% over the first quarter of 2022 year-over-year.
Many industry observers argued that the increased institutional adoption of fixed-income ETFs comes after the U.S. Federal Reserve began purchasing bond ETFs as part of its massive post COVID-19 efforts to stabilize the economy and financial markets in the wake of the pandemic selling. The act of purchasing ETFs by the central bank is seen as a kind of implicit government approval for the investment vehicle.
“I think the Fed using ETFs demonstrated that they are a valid investment vehicle,” Deborah Fuhr, founder of ETFGI, told FT but added that there had not been a disproportionate shift to fixed income. “I do think that people are embracing fixed income ETFs more, but they are embracing all ETFs more.”
Fixed income ETFs made up about 18.3% of the ETF market in December 2020, but its market size slightly fell to 15.9% in December 2021 and was almost unchanged at the end of April 2022 at 16.2%.
Gould also argued that the liquidity of fixed income ETFs in March 2020 compared to underlying components also helped attract institutional investors, pointing out that more large clients have increased exposure to fixed income ETFs by making relationships with market makers and liquidity providers.
“Not having the ability to access one of the most liquid tools out there doesn’t make sense. If you’re an institutional investor you want to be able to access what you can,” Gould added.
Looking ahead, the industry remains optimistic about the growth of the fixed-income ETF space. According to a recent BlackRock note, $40 billion moved into global bond ETFs over the first quarter of 2022 “even as a generational rise in inflation and tighter monetary policy resulted in sharp price declines for closely followed bond benchmarks.”
BlackRock even projected that assets in fixed income ETFs could balloon from $1.7 trillion to $5 trillion by the end of this decade with institutional clients contributing to the growth as they utilize ETFs for the like of liquidity management and portfolio efficiency.
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