Investors demonstrate appetite for innovation in fixed income ETFs

Jul 30th, 2019 | By | Category: Fixed Income

Finding innovative sources of return that are structural and uncorrelated is a priority for around 85% of wealth managers and institutional investors, according to a survey from fixed income ETF provider Tabula Investment Management.

MJ Lytle, Chief Executive, Tabula Investment Management

Michael John Lytle, CEO of Tabula Investment Management.

According to the survey, 51% of professional investors expect to see the level of smart beta and innovation being used in the fixed income ETF sector increasing over the next three years, with only 2% expecting it to decrease.

Investors also expect to see a rise in allocations being made to environmental, social and governance (ESG) strategies. Over half (54%) expect an increase here over the next three years. Only 5% think flows to ESG strategies will decline.

The findings resonate with recent comments from fellow ETF provider Amundi on opportunities in fixed income smart beta. Bruno Taillardat, Head of Smart Beta & Factor Investing at Amundi, said that the increasing adoption of smart beta and factor-based solutions in the area of fixed income investment “represents an exciting challenge for asset managers seeking to design the right solutions to address clients’ needs.”

In a bid to capitalise on potential opportunities, Amundi has teamed up with EDHEC-Risk Institute to conduct two new studies investigating the theoretical and practical challenges involved in harvesting risk premia in fixed income markets.

Similarly, investors’ expectations that ESG fixed income strategies are poised to thrive are starting to be borne out in the numbers.

Funds that were first to exploit opportunities in the ESG bond space – such as the UBS ETF Bloomberg Barclays MSCI US Liquid Corporates Sustainable UCITS ETF (CBSUS IM) and iShares € Corp Bond ESG 0-3yr UCITS ETF (SUSE LN) – have seen assets grow at a very respectable pace. These two funds, which debuted in August 2015 and January 2016, respectively, now stand at $321m and $667m in assets under management.

A more recent addition from BlackRock, the iShares € Corp Bond ESG UCITS ETF (SUOE LN), has raced to $713m in assets in a little over a year since its launch.

Tabula’s research also found that the average ticket size in ETF trades will increase. One in five anticipates this, with none of the investors polled expecting it to shrink.

Commenting on the research, Michael John Lytle, CEO of Tabula, said, “Fixed income ETFs not only provide easy and cost-efficient access to standard bond indices, they can also deliver new and innovative investment opportunities – this is at the centre of what we do at Tabula.”

Since its inception in 2018, Tabula has been calling for greater research and development in fixed income ETFs, arguing that the innovation that ignited the equity ETF market has, perhaps until now, been lacking in the fixed income sector.

Tabula’s roster of products includes a leveraged investment-grade credit ETF, long and short high-yield credit ETFs, and, recently launched, a credit volatility premia ETF.

This latest ETF, the Tabula J.P. Morgan Global Credit Volatility Premium Index UCITS ETF (EUR) (TVOL LN), arguably one of the most innovative launches in the fixed income space to date, has already grown to $60m in assets despite only being four months old – a clear demonstration of investors’ appetite for innovation.

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