Large Fixed-Income Investors Increasingly Turn to Liquid Bond ETFs

The fixed-income markets are notoriously known for their illiquid securities. However, more investors are increasingly looking to bond-related ETFs as a quick and easy way to gain broad exposure to debt markets.

While fixed-income ETF assets account for less than 1% of the value of outstanding bounds globally, a number of factors have contributed to a rising demand for bond-related ETFs.

For instance, regulatory reforms enacted after the financial crisis have led to significant reduction in inventories of debt held by broker-dealers and banks, the Financial Times reports. Meanwhile, corporate debt issues have increased significantly as companies took advantage of lower rates.

Eric Wiegand, head of ETF strategy at DWS, pointed out that the expanded corporate bond market is very fragmented, with a range of credit profiles and maturities. “Meanwhile, the role of banks and brokers as a facilitator of trades has shrunk. So it is more difficult for institutional investors to trade large portfolios of bonds,” Wiegand told the Financial Times.

Related: 5 Key Things to Know About Fixed Income ETFs

Consequently, more investors have turned to fixed-income ETFs, especially among institutional level investors. According to a Greenwich Associates survey of 120 European institutional investors, 45% of respondents used bond ETFs in 2017, compared to 38% in 2016. The increased interest has also helped improve liquidity in the ETF market, making it easier for investors to execute large trade orders.

“It is now possible to efficiently trade $100m in a corporate or emerging markets bond ETF in a single transaction. That was not possible even just a few years ago. We expect to see more investors gravitate towards fixed income ETFs,” Wiegand said.