Market Overview

Bond ETFs Are Big And Only Getting Bigger

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Bond ETFs Are Big And Only Getting Bigger

Just last month, BlackRock Inc. (NYSE: BLK), the parent company of iShares, the world's largest exchange traded funds issuer, said that global fixed income ETFs reached $1 trillion in combined assets under management. Perhaps more notable was the forecast that that figure will double to $2 trillion over the next five years.

What Happened

Additional data support the notion that bond ETFs are poised to keep growing. Consider this: At $1 trillion, fixed income ETFs represent a scant percentage of the $105 trillion global bond marketplace, according to BlackRock.

“Wider adoption has translated into heavier trading volumes, which generally result in lower on-exchange transaction costs,” said BlackRock in a recent note. “Convenience and ease of trading help explain why investors increasingly rely on bond ETFs to reposition their holdings during periods of market turbulence, such as the final months of 2018.”

Why It's Important

Flows confirm bond ETF adoption is on the rise and is happening across multiple corners of the fixed income universe. Year to date, five of the top 10 asset-gathering ETFs in the U.S. are bond funds. That quintet includes Treasury funds, mortgage-backed securities, junk bonds and international debt.

“All types of investors are recognizing that modern portfolios combine active management and index-tracking products,” according to BlackRock. “Some investors use broad bond ETFs to diversify their stock holdings; others use term-maturity bond ETFs to help generate predictable income through laddering; and still others use bond ETFs alongside individual securities in their portfolios.”

The iShares 7-10 Year Treasury Bond ETF (NASDAQ: IEF) and the iShares MBS ETF (NASDAQ: MBB) are among this year's top asset-gathering bond ETFs, having hauled in more than $11.1 billion combined.

What's Next

As for what's next for bond ETFs, that's easy: more adoption and more growth. With the Federal Reserve poised to lower interest rates, perhaps this week, investors could be drawn to higher-yielding asset classes within the bond ETF realm.

“Recent market trends underscore that bond ETFs are tools for building dynamic portfolios,” said BlackRock. “U.S.-listed bond ETFs pulled in $37.4 billion in the second quarter of 2019, the “most of any quarter on record. These days, many investors are actively targeting bond ETFs to search for yield as global central banks consider whether to loosen monetary policies in the near future.”

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