Bond ETFs to Gain Share From Individual Bonds & Mutual Funds

By Todd Rosenbluth, CFRA

Advisors are increasingly gaining comfort in using bond ETFs to build portfolios and continue to plan to move assets away from mutual funds and individual bonds. Yet, relative to equity ETFs, more advisors favor the diversification and ease of exposure benefits of these products, while viewing performance as less meaningful.

These are some of the key takeaways from a recent Cerulli Associates survey of 378 advisors that manage at least $50 million in assets and take discretion over half of the assets. Bond ETFs comprised just 18% of exchange traded market at the end of May 2017 according to data, but pulled in 28% of the inflows this year.

CFRA thinks that growing comfort by advisors will help to spur additional inflows in the coming years. Half of the advisors surveyed planned to increase usage of bond ETFs in the next three years, while only 12% expect to decrease usage. In contrast only 23% and 18% of advisors aim to add individual bonds and bond mutual funds, respectively, while 29% and 39% anticipate decreasing usage in these income-generating products.

iShares fixed income strategist at Blackock Karen Schenone thinks many advisors are discovering that bonds ETFs offer the same benefits as equity ETFs – a low cost and tax efficient way to invest. BlackRock sponsored the report with Cerulli Associates.

However, investors need to understand that various ETF providers offer low-cost products in these investment styles and the portfolios are not identical.

For example, iShares Core 1-5 Year USD Bond ETF (ISTB) and Vanguard Short-Term Bond ETF (BSV) are available for net expense ratios of 0.08% and 0.07%, respectively. In contrast, the average short-investment grade debt mutual fund had a net expense ratio of 0.76%. One example among the mutual funds with $500 million in assets and an above-average expense ratio is Lord Abbett Short Duration Income Fund (LDLAX).

ISTB’s three-year track record as of May 31 of 1.41% was ahead of BSV’s 1.13%. The iShares product sports a higher yield, due to greater exposure to investment-grade corporate bonds and less exposure to government bonds.