The exchange traded fund segment is considered a fledgling in the financial industry, but it has been around long enough for four popular bond ETFs to cross their 15-year mark.
The iShares 1-3 Year Treasury Bond ETF (NYSEArca: SHY), iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF), iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) and iShares iBoxx $ Investment Grade Corporate Bond ETF (NYESArca: LQD) recently turned 15 after Barclays Global Investors first announced back in the day that they would start trading on the American Stock Exchange on July 26, 2002.
The handful of bond ETFs’ claim to fame were their intra-day pricing of groups of bonds that have similar maturities or quality, their ability to trade like stocks on the secondary market and the cheap fees when compared to the average bond index mutual fund.
Since then, the bond ETF industry has grown to $704 billion in assets under management with nearly 1,000 funds to choose from globally, according to a BlackRock note.
Over the past decade, trading volume in bond ETFs has expanded at a 30% annual rate. In the U.S., about $130 billion in bond ETFs are traded per month, or nearly $6 billion per day.
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The emergence of a new options market in the U.S. bond ETF segment has also opened up the market and created greater pricing efficiency. The listed options market for U.S. bond ETFs has almost tripled over the past three years, hitting an all time high of $45 billion in 2016.
However, despite the rapid growth of the ETF universe, the bond ETF market segment remains relatively underappreciated. The U.S. fixed income market is about 1.9 times the size of the equity market. However, bond ETF penetration is only one-ninth of the level of equity ETF penetration. U.S. equity ETFs make up 8.5% of total U.S. equities, but U.S. fixed-income ETFs only account for 0.9% of the total market, compared to 7.1% for U.S. fixed-income mutual funds.
The bond ETF market is only a shadow of the size of the other global markets. While global bond ETFs hold about $700 billion in AUM, global equity ETFs hold about $3.2 trillion, global mutual funds has $21. trillion and global fixed income has accumulated $96 trillion.
The disparity between bond ETF and stock ETF penetration suggests that there is a lot of room for further growth in the fixed-income ETF space, and the 15-year history for bond ETFs may be only signalling the beginning stages of growth.
For more information on the fixed-income market, visit our bond ETFs category.