Institutional money is driving record demand for fixed income exchange-traded funds (ETFs). While the majority of retail investors don’t have treasure chests of capital to throw at fixed income, they can still get in on the action with certain ETFs.

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.

Credit goes to the versatility and dynamic ability of ETFs to be traded like shares of equities. Fixed income funds offer retail investors the ability to get exposure to the bond market without holding the individual bonds themselves.

Institutions like them too.

“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.”

Fixed income investors who want income options without taking on too much duration risk can look to funds like the Principal Ultra-Short Active Income ETF (USI). The fund is an actively managed fund that seeks to achieve its investment objective by investing, under normal circumstances, at least 80% of its net assets, plus any borrowings for investment purposes, in investment-grade bonds and other debt securities.

USI invests in fixed- and floating-rate securities. Under normal circumstances, the fund maintains an average effective maturity of three years or less and an average portfolio duration of one year or less.

Investors in USI can reap the following benefits:

    • Active management Combines bottom-up independent credit research with top-down strategy, supported by rigorous risk mitigation at each step.
    • Straight forward process Investment process is free of derivatives, duration bets, and unrated issues.
    • Strategic perspective Biased towards issuers with traits like stable cash flows, hard assets, and the potential to benefit from demographic trends.

     

  • USI Chart

    USI data by YCharts

A Tax-Advantaged Fixed Income Option

Another fixed income option worth considering is the Principal Spectrum Tax-Advantaged Dividend Active ETF (PQDI). PQDI seeks to provide current income. Under normal circumstances, the fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in dividend-paying securities at the time of purchase.

Such securities include, without limitation, preferred securities and capital securities of U.S. and non-U.S. issuers. The fund invests significantly in securities that, at the time of issuance, are eligible to pay dividends that qualify for favorable U.S. federal income tax treatment, such as dividends treated as qualified dividend income (QDI) or qualified dividends from real estate investment trusts (REITS).

PQDI is the first of its kind—offering investors access to qualified dividend income via all three sectors of the global U.S. dollar capital securities market. As mentioned, PQDI targets qualified dividends, thereby helping U.S. taxpayers boost after-tax income.

For more market trends, visit ETF Trends.com.