Market Overview

Fixed Income ETF Volume Surged In 2018

Fixed Income ETF Volume Surged In 2018

Last year, fixed income exchange traded funds hauled in a record $97 billion in new assets, or almost a third of all the year's inflows to U.S.-listed ETFs.

New data from BlackRock Inc. (NYSE: BLK), the parent company of iShares, the world's largest ETF issuer, volume in bond ETFs jumped last year, too.

What Happened

Three of last year's top 10 ETFs in terms of new assets added were bond funds, a group including the iShares Short Treasury Bond ETF (NYSE: SHV) and the iShares 1-3 Year Treasury Bond ETF (NASDAQ: SHY).

Likewise, three of the 10 worst ETFs in terms of assets lost were fixed income funds, a group including the iShares iBoxx USD Investment Grade Corporate Bond ETF (NYSE: LQD). Money moving into and out of bond ETFs triggered a corresponding uptick in volume in the funds.

“2018 was a record year for US FI ETF secondary trading volumes, with $2.2 trillion of aggregate volumes across issuers or $8.5 billion/day, on average,” according to BlackRock.

Why It's Important

The Federal Reserve raised interest rates four times last year, likely triggering some of the increased activity in bond ETFs. It's widely expected the Fed will slow its pace of rate hikes in 2019 or potentially not boost borrowing costs at all.

While 2019 is still in its infancy, the more sanguine rate outlook has some investors again flocking to bond ETFs early in the year. This month, seven of the top 10 asset-gathering ETFs are bond funds. That follows a strong December of bond ETF activity.

“December 2018 was also a record trading volume month for US FI ETFs amid heightened market volatility, as volumes totaled $273 billion ($13 billion/day), a ~$28 billion increase from the previous record set in October 2018,” said BlackRock.

What's Next

BlackRock data indicate bond ETF volume is outpacing asset growth across a variety of fixed income segments, including emerging markets debt, investment-grade corporate debt, junk bonds and municipal bonds.

“The 2018 growth rate in Muni ETF trading volumes was 2.5X greater than comparable AUM growth,” said BlackRock. “This dynamic speaks to the increasing usage of FI ETFs by investors, both institutional and retail, for various portfolio applications such as tactical beta, liquidity management, strategic exposure, portfolio completion, and listed options use-cases.”

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