ETFs have also become a go-to tool that traders use during more volatile conditions as ETFs often exhibit deeper pools of liquidity than their underlying debt securities. For instance, U.S. high-yield bond ETFs were tested during a stressful period in late 2015 when Third Avenue management unexpectedly blocked investor withdrawals from its high-yield mutual fund.
“Investors moved into the liquid instruments, ETFs, even as the signs of stress in the underlying bonds rose,” Wiegand said, adding “ETFs became the vehicle for price discovery in the high-yield market during that period of volatility.”
Related: Short Treasury Bond ETF in Play as Russia Loses U.S. Debt Appetite
Furthermore, the low-costs and efficient structure associated with the ETF wrapper has also attracted many more institutional investors in recent years.
“The largest inflows we have seen have come from investors who are no longer willing to pay annual management fees of 50 to 75 basis points for an actively managed bond fund when its is possible to buy sovereign bond ETFs for less than 10 bps,” Adam Laird, head of ETF strategy in northern Europe for Lyxor, told the Financial Times.
Given the rising interest in bond ETFs among larger investors, BlackRock projected that global ETF assets could hit $12 trillion by 2023, with fixed-income ETFs accounting for $4 trillion over the next five years.
For more information on the fixed-income space, visit our bond ETFs category.