The first bond ETFs began trading 20 years ago last Friday, and the industry is poised for continued growth in the decades to come. On July 22, 2002, the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) and the iShares 20+ Year Treasury Bond ETF (TLT) began trading approximately nine years after the first U.S. ETF kickstarted the market. As of mid-July 2022, bond ETFs manage $1.2 trillion in US-listed ETFs and represent 20% of the industry.
LQD is now a $33 billion fund offering diversified exposure to approximately 2,500 bonds with credit ratings ranging from AAA (extremely safe but with low yields) to BBB (moderately safe with moderate yields). The fund also provides exposure to a mix of bond sectors like banking, communications, energy, and technology. LQD sports a 30-day SEC yield of 4.7% and traded an average of 18 million shares in the past month. LQD was one of the ETFs utilized by the Federal Reserve in 2020 to provide stability to the bond market, and insurance companies owned 13% of its shares at the end of 2021 due to its liquidity and ease of use.
In the subsequent years since LQD’s launch, iShares has brought out a short-term version — the iShares 0-5 Year Investment Grade Corporate Bond ETF (SLQD) — and a rate-hedged one — the iShares Interest Rate Hedged Corporate Bond ETF (LQDH) — for those wanting the credit exposure but not the interest rate sensitivity LQD provides. Other asset managers also offer corporate bond ETFs providing advisors a choice with products like the SPDR Bloomberg High Yield Corporate Bond ETF (JNK) and the Vanguard Short-Term Corporate Bond ETF (VCSH).
Meanwhile, TLT is now a $23 billion fund providing investors with the relative safety of the U.S. Treasury bonds and a 30-day SEC yield of 3.2% for those willing to take on the elevated interest rate risk. TLT trades on average 17 million shares. In more recent years, iShares has successfully launched short-term Treasury bond ETF products, such as the iShares 1-3 Year Treasury Bond ETF (SHY), which outgrew TLT as investors sought to further protect the downside of their fixed income exposure.
Treasury ETFs have been a safe haven in 2022. Secondary volumes across Treasury ETFs, using the monthly average, increased by nearly 50% in the first half of 2022, far above the 3% increase in nominal Treasury average daily volume, based on Bloomberg and SIFMA data. Other asset managers entered the market in the past two decades with products such as the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) and the Vanguard Short-Term Treasury ETF (VGSH). However, iShares Treasury ETFs averaged a substantial 73% of secondary market Treasury ETF volumes in the first half of 2022.
The fixed income ETF market has experienced strong product proliferation in the last two decades. Currently, advisors can benefit from diversified, easy access to markets like senior loans with the First Trust Senior Loan Fund (FTSL) and the Invesco Senior Loan ETF (BKLN), as well as local currency emerging markets with the VanEck JPMorgan Emerging Markets Local Currency Bond ETF (EMLC), municipal bonds with the Vanguard Tax-Exempt Bond ETF (VTEB), and collateralized loan obligations (CLOs) with the Janus Henderson AAA CLO ETF (JAAA).
In addition, advisors can obtain more targeted exposure to bonds maturing in one particular year with products like the Invesco BulletShares 2024 Corporate Bond ETF (BSCO), invest in Treasury inflation-protected securities (TIPS) with the Schwab U.S. TIPS ETF (SCHP), or tap into the security selection expertise within the investment-grade universe using active ETFs like the JPMorgan Ultra-Short Income ETF (JPST) and the PIMCO Active Bond ETF (BOND).
In the past year alone, established asset managers like Capital Group, DoubleLine, Federated, and Harbor, as well as new entrants like BondBloxx, rolled out their first suite of ETFs and included bond products. While fast-growing, the ETF market is also relatively concentrated.
The 10 largest fixed income ETF providers manage 96% of the assets in the U.S., led by BlackRock/iShares (43% share of the market), followed by Vanguard (29%) and State Street Global Advisors (9%). BlackRock also has the broadest suite of products with 114 offerings, while Charles Schwab, the fourth-largest fixed income ETF provider, has only seven.
So what’s ahead? We see tremendous room for asset growth as more advisors turn to bond ETFs as building blocks in asset allocation portfolios to meet client objectives, more asset managers bring active strategies to meet investors where they are, more institutional investors turn to ETFs to hedge risks, and as more bond trading takes place through ETFs.
For any advisor under the age of 45, this will likely be the first investment environment of their lifetimes where the “solve for” has included both meaningful bond yields and meaningful inflation. Advisors are going to need not just better and more useful products, but a ton of education. That’s hopefully where VettaFi can help.
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