While bond exchange traded fund assets are but a shadow of the total assets found in equity-related ETFs, more investors are growing comfortable with the various ETF investments and will continue to fuel growth in the fixed-income segment.
“CFRA thinks that growing comfort by advisors will help to spur additional inflows in the coming years,” Todd Rosenbluth, Director of ETF & Mutual Fund Research, CFRA, said in a research note.
More have increased their utilization of bond ETFs to build portfolios and continue to shift assets away from mutual funds and individual debt securities. Relative to equity ETFs, though, advisors favor the diversification and ease of use offered by these bond ETFs, viewing performance as a less urgent matter.
This is reflected in a recent Cerulli Associates survey of 378 advisors with at least $50 million in assets and take discretion over half of the assets.
We are also seeing increased interest in bond ETFs among the investment community. While bond ETFs made up just 18% of the ETF market as of the end of May 2017, fixed-income-related ETFs attracted 28% of inflows this year.
Half of Cerulli surveyed advisors planed to raise usage of bond ETFs in the next three years while only 12 expect to reduce usage. On the other hand, advisors aim to only add 23% and 18% to individual bonds and bond mutual funds, respectively, while 29% and 39% expect to decrease usage in these income-generating products all together.
In contrast, the ETF outlook is much rosier. Among advisors that have between 15% to 29% of client assets in ETFs, 60% of those surveyed expect to increase usage of bond ETFs and 45% of them plan to diminish exposure to bond mutual funds.
Fueling the ongoing growth of bond ETFs, iShares fixed income strategist at Blackock Karen Schenone argued that many advisors are discovering bonds ETFs offer the same benefits as equity ETFs – a low cost and tax efficient way to invest.
“CFRA thinks the forward looking trends have as much to do with investor expectations of higher interest rates and aiming to use products to tilt their portfolios to protect the downside, while still generating income,” Rosenbluth said.
For instance, investment-grade bond ETFs are used the most by advisors at 77%, ahead of other investment styles such as short-term bond 70%, high yield bond 67% and government bond/US Treasury’s 55%. However, among surveyed advisors, 28% expect to increase exposure to short-term, 28% to high yield and 27% to investment-grade bond ETFs, compared to just 16% of those surveyed for government bond/US Treasuries.
“Schenone of iShares thinks we’re only in the second inning of advisors using bond ETFs across their practice,” Rosenbluth added. “CFRA agrees the environment is ripe for bond ETFs to gain additional assets in the next few years as advisors gain comfort with these passive and active products.”
For more information on the fixed-income market, visit our bond ETFs category.