Cerulli predicts strong growth for fixed income ETFs

Jan 10th, 2023 | By | Category: Fixed Income

The proportion of US-based investment advisors utilizing fixed income ETFs is continuing to grow with 70% reporting use in 2022 compared to 63% in 2021, according to research from Cerulli Associates.

Cerulli predicts strong growth for fixed income ETFs

Daniil Shapiro, Director at Cerulli Associates.

Cerulli notes that there are myriad reasons leading to the greater uptake of fixed income ETFs, advising fund managers to pay close attention to a category that has the potential for long-term sustainable growth.

The Cerulli US Exchange-Traded Fund Markets 2022 report highlights the top driver of increased flows into fixed income ETFs as greater familiarity with the ETF structure by advisors and institutional investors, followed by the prospect of higher yields.

Product developers have taken notice of the growing demand for fixed income ETFs. According to Cerulli’s research, two-thirds (66%) of current ETF issuers consider fixed income to be a primary focus for ETF product development, overtaking even US equity which was cited by 57% of respondents.

Cerulli believes fund managers who will most capitalize on this opportunity include those offering fee-competitive products or exposures within relatively underexplored investment categories. In particular, Cerulli expects thematic and sustainable products to play a greater role within the fixed income landscape as a wider base of investors takes to these exposures.

Daniil Shapiro, Director at Cerulli Associates, commented: “While inflation and rising rate protection strategies are getting attention in the current environment, managers have an opportunity to create interesting exposures that target a broader range of themes, ideally in a diversified and responsible manner. In doing so, managers may be able to broaden their reach to a retail investor base.

Shapiro added: “Fee dynamics in active fixed income ETFs will intensify as they have in the rest of the ETF ecosystem. Managers offering excellent performance and managing strategies meant to generate greater returns will likely be able to charge a premium relative to ultra-low-cost, short-term exposures.”

Cerulli notes that the opportunity for prospective ETF issuers is being facilitated by the availability of semi-transparent ETF structures# which allow fund managers to shield their proprietary investment strategies from competitors, as well as the proliferation of ETF white-labeling services which assist managers in bringing their strategies to market.

White-label platforms help to lower the barriers to entry by offering a full package of services including product development, compliance, capital markets, sales, marketing, and distribution, for a fee. Existing participants in the US include ETF Managers GroupTidal Financial ServicesExchange Traded Concepts, and ETF Architect, while Goldman Sachs announced in December that it will launch its own white-labeling service, becoming the first major Wall Street institution to enter the fast-growing market.

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