Smart beta equity exchange traded funds have been well received among investors, and in the wake of the success, asset managers are now looking to craft smart beta fixed-income ETF options.
After a three-decade long bull run in the fixed-income space, investors may have a harder time generating attractive returns with their bond investments. To meet this growing demand for alternative investment strategies, financial engineers at big asset managers are creating more next-generation fixed income ETFs that go beyond mimicking traditional beta indices.
“This is the next frontier of factor investing, and will become the next battleground as money begins to pour in,” Rob Nestor, head of BlackRock’s US iShares smart beta team, told the Financial Times.
There are now 23 non-traditional bond ETFs with total assets of nearly $10 billion, according to Morningstar data. In contrast, there is nearly $600 billion in smart beta equity ETFs. Given the wide disparity, industry insiders expect there is much more room for innovation in the fixed income landscape in the years ahead – Nestor pointed out that there are 25 smart beta bond ETFs already registered with the Securities and Exchange Commission waiting on approval.
Smart beta bond ETFs may be a better way for fixed-income investors to access the debt markets. Market-cap weighted bond indexing means that the more indebted a company or country is, the bigger the weight it is in an index, which means that investors are basically lending evenmroe money to already heavily-indebted borrowers. For instance, the U.S., Italy and Japan together make up over half of the entire $47.5 trillion Bloomberg Barclays Global Aggregate, the largest international bond index.
“Investing more in the biggest issuers of bonds isn’t necessarily the best way to invest in fixed income,” Todd Rosenbluth, director of ETF and mutual fund research at CFRA, told the Financial Times. “The next wave [of ETFs]will be these new smart beta bond products. We’re starting to see it.”
For more information on the fixed-income market, visit our bond ETFs category.