Exchange traded funds’ assets under management reveal a large disparity between investors’ demand for equity and bond exposure, but this may leave an opportunity for the ETF industry to fuel further growth by attracting greater investment interest in fixed-income related strategies.
In an attempt to gauge the investment community’s usage of bond-related ETFs, BlackRock commissioned Cerrulli Associates to conduct an online survey of 378 financial advisors over December 2016 and January 2017 to ask them about their practices and specifically their use of bond ETFs.
The survey revealed that while the usage of bond ETFs is broad, it is not deep. About 87% of advisors said they used a bond ETF but assets in these funds continue to significantly fall behind equity ETFs.
According to XTF data, there are now 2,027 exchange traded products from 108 fund sponsors listed on 4 U.S. exchanges with $3.030 trillion in assets under management. However, there are only 311 U.S.-listed fixed-income ETFs with $486.4 billion in assets under management.
Financial advisors have recognized bond ETFs for their scalability, ease of exposure and diversification qualities. However, some advisors continue to prefer individual bonds due to their desire to better micromanage client portfolios and defined maturities or look to bond mutual funds due to a the expertise of the active management.
Some sophisticated users of bond ETFs, though, have already used the investment vehicle to position client portfolios in anticipation of shifting economic conditions ahead.
Consequently, Cerulli argued that the ETF industry may have an opportunity to grow demand for bond ETFs through greater education and awareness of the products available.
“Use of bond ETFs can be expanded not just through education on the mechanics of the vehicle, but also through rethinking bond portfolios in a more holistic and scalable fashion. Bond ETFs could be used in a variety of ways in this construct, including being paired with individual bonds or mutual funds,” according to a Cerulli Associates research note.
Moreover, the financial industry could proffer ways for advisors to incorporate ETFs into a diversified investment portfolio, especially with changing market and regulatory conditions ahead.
“Demonstrating to advisors how to build better and more consistent bond portfolios could lead to better client outcomes, which is especially relevant in a heightened regulatory climate,” according to Cerulli.
As more financial advisors familiarize themselves with fixed-income ETFs, the bond ETF category may attract greater inflows and increased usage among various investors, similar to how stock ETFs have grown to what we see today.
For more information on the fixed-income market, visit our Bond ETFs category.