Smart Beta Bond ETFs Could Be the Next Frontier

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.