Bond ETFs on track to reach $1.5 trillion by 2022, says BlackRock

Oct 23rd, 2017 | By | Category: ETF and Index News

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Assets invested in bond ETFs are on track to double to $1.5 trillion globally by 2022 if current growth rates persist, according to BlackRock.

Bond ETFs to reach $1.5 trillion by 2022, says BlackRock

BlackRock has captured approximately 46% of global net inflows into bond ETFs year-to-date.

The asset manager behind the iShares range of ETFs notes that the global bond ETF industry has seen a significant uptick in net inflows during 2017, gathering $126.4bn as of the end of September – already surpassing 2016’s full-year flows of $115.6bn.

BlackRock has captured approximately 46% of these flows year-to-date (YTD), including $47.9bn into its US-listed and $10.4bn into its EMEA-listed bond ETF suites.

During Q3, fixed income ETFs globally attracted net inflows of $38.7bn, driven by flows into investment grade corporate bond ETFs ($9.4bn), Treasuries ETFs ($7.0bn), multi-sector fixed income ETFs ($5.8bn) and US high yield ETFs ($4.9bn).

BlackRock captured a slightly lesser share (45%) of net new assets over this period, including $14.8bn into its US-listed and $2.8bn into its EMEA-listed bond ETFs.

Brett Olson, head of iShares EMEA fixed income, commented: “Remarkably steady growth at above-trend rates is fostering subdued market volatility, driving investor appetite for risk assets. In Q3, investors favoured USD assets, notably investment grade corporates, treasuries and multi-sector fixed income exposures.”

Emerging Market Debt has been a strong driver of bond ETF flows this year, attracting $16bn YTD. According to BlackRock data, both local and hard currency exposures continued to gather inflows in roughly even proportions during Q3. European-based investors drove demand for hard currency exposures, while local currency funds attracted US and European investors alike – a noteworthy shift from earlier in the year when US investors heavily favoured hard currency exposure.

Commenting on the flow patterns during Q3, Heather Brownlie, head of iShares US fixed income, noted the importance of diversification to investors’ portfolios over this period. She said: “The brief August sell-off driven by macro risk concerns around North Korea were a helpful reminder for some investors to pay attention to rates exposure in their portfolios.”

“While we saw significant inflows into treasury-based ETFs, inflation in the US will be key to the policy and market outlook,” continued Brownlie. “We prefer TIPS over nominal treasuries given the challenges a sustained economic expansion pose for treasuries, and valuations look more favourable amid weaker inflation prints.”

Looking ahead, BlackRock sees passive funds becoming an increasingly popular tool for bond exposure as changing bond market structure increases the costs and complexities of building fixed income portfolios solely with individual securities.

Post-crisis, demand for transparent, standardized and bundled exposures has manifested in growth among index-based products, including ETFs. Bond ETFs in particular have proven to be a valuable solution in meeting these needs, reflective in assets invested in these funds growing more than 25% per year for the last five years.

Lastly, adopting a more cautious tone, BlackRock reminds investors to keep an eye on central bank behaviour – with the ECB expected to taper and the Fed and BoE expected to raise rates before the end of the year, the scene is set for monetary policy divergence. The asset manager notes, however, that bond ETFs are critical as tools for investors looking to be nimble and flexible.

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