Institutional Demand Is Driving Record Growth in Fixed Income ETFs

The fixed-income exchange traded fund space has long been overshadowed by their equity counterpart, but the recent volatility has spurred a sudden spike in institutional demand for liquid, transparent and efficient access to the bond markets.

According to BlackRock’s new paper, “Turning point: how volatility and performance in 2020 accelerated institutional adoption of fixed income ETFs”, fixed income ETF assets under management ended June at a record $1.3 trillion, with the majority of this growth of 84% came from new inflows. For example, iShares alone added $105 billion, evenly split between the second half of 2019 and the first half of 2020.

Institutional clients recognized the versatility of fixed income ETFs and accelerated their adoption of ETFs in to adapt to changing market conditions, price individual bonds and portfolios, reduce transaction costs, manage liquidity, and hedge risk.

BlackRock also counted over 60 global pension funds, insurers, and asset managers were first time buyers of iShares fixed income ETFs, which collectively added about $10 billion in new assets.

“The versatility and resilience of the largest and most heavily traded fixed income ETFs, especially through market stresses this year, have made them more central to the construction of institutional investors’ portfolios,” Salim Ramji, Global Head of iShares and Index Investments at BlackRock, said in a note. “Accelerated institutional adoption is further recognition that ETFs are modernizing the bond markets by increasing overall transparency, improving liquidity, and lowering trading costs.”

Despite the sudden spike in activity, the fixed-income ETF space still has a long way to go. Bond ETFs only represent about 1% of the $100 trillion global fixed income securities market. However, BlackRock believes that institutional investors could help expand global fixed income ETF assets to $2 trillion by 2024.

“Fixed Income ETFs helped the credit markets operate better during times of market stress, including the unprecedented turmoil seen earlier this year,” Carolyn Weinberg, Global Head of iShares Product at BlackRock, said in a note. “These ETFs contributed significantly to the financial ecosystem by providing additional liquidity and price discovery, relieving pressure from the underlying bond markets at a time when that was required.”

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