Systemic Shift in Investing Helps Fixed-Income ETFs Attract Billions

Fixed-income ETFs have lagged behind the equity side, but we are beginning to see a shift that could potentially help bond ETFs attract billions of dollars and play catch up.

Armando Senra, head of U.S., Canada and Latin America iShares at BlackRock, projected that iShares’ suite of fixed-income ETFs could double its asset over the next five years, CNBC reports.

“From a cyclical perspective, you’ve seen a lot of flows going into fixed-income ETFs. It’s natural,” Senra told CNBC. “You have a lot of market volatility. People have a risk-off trade. So, you’ve seen that, and you’ve seen money coming off from equities.”

“You have a more structural element, which is why we think that fixed-income ETFs are at the very early days of growth,” he added. “It took us 17 years to get to [$]1 trillion in assets. We believe we’re going to double that amount in five years.”

U.S.-listed ETFs now hold a little over $4 trillion in assets under management, but the 392 bond ETFs trading in the U.S. only have about $773 billion in assets under management, according to ETFdb data. BlackRock’s iShares has 92 U.S.-listed bond ETFs with $372 billion in assets under management.

Looking ahead, Senra argued that bond ETFs could attract greater attention as the fixed-income side enjoys the same forces that initially drove investors to stock-based ETFs.

“The same thing that you saw with equity ETFs, how people are using equity ETFs to replace individual securities, that’s what you will see with fixed-income ETFs,” Senra said. “They’re replacing bonds. They’re providing you liquidity, it’s a more convenient way to have a bond portfolio, and [there’s] efficiency. That’s where the money’s going to be coming from.”

However, John Davi, founder and chief investment officer at Astoria Portfolio Advisors, warned that investors should not ignore the risks with bond ETFs, especially with the recent rally depressing yields and increased rate risk with a higher duration exposure. He specifically highlighted the Federal Reserve’s low interest rate outlook that has kept “pushing people up the risk curve.”

Alfred Eskandar, co-founder, president and chief operating officer at Salt Financial, argued that “it’s all about diversification” when it comes to incorporating bonds into a portfolio.

“We don’t advise individual investors on money. We build analytics, and we look at it from a risk perspective, and fixed income is a way to manage risk in the portfolio,” Eskandar told CNBC. “So, holistically, how much risk do I want to carry going into Q4, going into 2020? And I could actually use fixed income to literally just dampen or balance my equity side of the portfolio.”

For more information on the fixed-income market, visit our bond ETFs category.