The fixed income ETF market has already ballooned to a $1 trillion space, but that figure could double within the next five years. Thanks to market volatility from the investors’ wall of worry, such as trade wars and inverted yield curves, the bond market is benefitting from the current risk-off sentiment.
“From a cyclical perspective, you’ve seen a lot of flows going into fixed-income ETFs. It’s natural,” said Armando Senra, head of U.S., Canada, and Latin America iShares at BlackRock Monday on CNBC’s “ETF Edge.” “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.”
The climb to $1 trillion in asset value for the fixed income ETF market didn’t happen overnight, but growth could accelerate rapidly in the forthcoming years.
“You have a more structural element, which is why we think that fixed-income ETFs are at the very early days of growth,” he said. “It took us 17 years to get to [$]1 trillion in assets. We believe we’re going to double that amount in five years.”
The beauty of an ETF is its ability to diversify and de-risk concentration in one stock and the same can be said with respect to the bond market. Investors can get core bond exposure without subjecting themselves to the risk of holding the actual debt.
“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.”
Getting Core Bond Exposure
With over $65 billion in total assets accumulated since its inception in 2003, the iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG) is the big fish in an even bigger sea of bond ETFs. What’s under the hood of this ETF that gives investors the much-needed core bond exposure, especially in today’s volatile market?
- AGG seeks to track the investment results of the Bloomberg Barclays U.S. Aggregate Bond Index.
- The index measures the performance of the total U.S. investment-grade bond market.
- The fund generally invests at least 90% of its net assets in component securities of its underlying index and in investments that have economic characteristics that are substantially identical to the economic characteristics of the component securities of its underlying index.
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