Bond ETFs Are Starting to Turn More Heads

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The exponential growth in stock exchange traded funds has greatly overshadowed the bond ETF segment as investors jumped on the rally in equities after the financial downturn. Nevertheless, the popularity of fixed-income ETFs is slowly gaining momentum in recent years.

According to a previous BlackRock note, bond ETF assets under management have expanded 25% annually for the past five years and are expected to hit $1.5 trillion by 2022, reports Gerrard Cowan for the Wall Street Journal.

As of mid-February, there was $780 billion in bond ETFs, representing 15% of the total ETF market, according to BlackRock data. In the U.S. market, there are 337 U.S.-listed fixed-income exchange traded products with  $551.5 billion in assets, compared to the total market of 2,183 U.S.-listed ETPs with close to $3.5 trillion in assets, according to XTF data.

While the fixed-income space's slice of the ETF pie remains small, bond ETFs have helped investors garner easier access to the notoriously illiquid debt securities market. As investors become accustomed to the ETF investment vehicle, more are utilizing the investment tool to gain exposure to various markets, including bonds. In 2017, bond ETFs attracted $138 billion in new inflows, compared to $112 billion in 2016.

Kathy Jones, senior vice president and chief fixed-income strategist at the Schwab Center for Financial Research, argued that individual investors are growing more comfortable with fixed-income ETFs. Assets under management on the Charles Schwab platform show U.S. fixed-income ETFs on its brokerage platform rose to $64.1 billion in 2017from $49.4 billion in 2016.

Jones also revealed that most of the new money flowing into bond ETFs are going into those with shorter durations, or bonds with a lower sensitivity to changes in interest rates, which is especially relevant giving the Federal Reserve's tightening monetary policy outlook. Rising interest rates have a negative impact on bond funds, notably those with a long duration. With short-term bond funds, investors can stay invested in fixed-income assets to hedge equity market risk and mitigate rate risks.

“I think people are very aware of the potential for interest rates to move higher, so they’re being more tailored about their fixed-income exposure,” Heather Brownlie, a managing director at BlackRock and global co-head of fixed-income at iShares, told the WSJ.

For more information on the fixed-income market, visit our bond ETFs category.

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