The rapidly-growing ETF industry has achieved another milestone, with fixed income ETFs surpassing the $1 trillion mark in global assets under management (AUM). As of the end of 2Q 2019, bond ETFs held $1.05 trillion of assets globally, compared to $4.26 trillion for equity ETFs worldwide, per analysis by Morningstar Inc. reported by Pensions & Investments.
ETFs have enjoyed explosive growth during the past 10 years, with fixed income assets up by 473% and equity assets up by 456%, per the same sources. ETFs issued in the U.S. account for the lion's share of the global ETF market, having crossed the $4 trillion threshold in early July, ETF.com reported.
The table below summarizes the action in bond ETFs.
- Fixed income ETFs are growing rapidly, and hit a milestone in assets.
- Demand is high among retail and institutional investors alike.
- If a wave of selling hits these ETFs, the bond market may be disrupted.
Significance For Investors
Industry sources cited by Pensions & Investments expect global assets in bond ETFs to double within the next 5 years, driven by rising demand from individual and institutional investors alike. Pension funds, endowments, money managers, wealth managers, and registered investment advisors increasingly see fixed income ETFs as an efficient, low-cost way to build portfolios and to make quick asset allocation changes.
"Bond ETFs were created to give individual investors easier access to bond markets, but they are increasingly being used as a tool by institutional investors, who have really pushed the growth of bond ETFs. Further growth is inevitable," as Kevin C. McPartland, managing director and head of market structure and technology at research firm Greenwich Associates, told P&I.
Nearly 25% of institutional asset managers' portfolios were invested in ETFs as of the end of 2018, according to a survey conducted by Greenwich Associates. Deteriorating performance by active investment managers has spurred demand for passive investment vehicles such as ETFs, among retail and institutional investors alike.
That survey had 181 respondents, including pension funds, endowments, foundations, insurance companies, and the asset management units of insurance companies, among others, per P&I. Bond ETFs were held by 60% of respondents, up from 20% in 2017. Among those who held bond ETFs, 42% plan to increase their holdings. Moreover, 78% said that ETFs are their preferred vehicle for building portfolios, or parts of portfolios, that are linked to bond or equity market indexes.
Some segments of the bond market lack liquidity, making fixed income ETFs preferable to individual bonds. "Trading physical bonds--especially high-yield and credit bonds--has become more difficult in the last 15 years," as Phillip R. Nelson, partner and director of asset allocation at Boston-based investment consultant NEPC LLC, told P&I. He observed that ETFs are "a quick way" to invest in bonds.
Skeptics warn that bond ETFs, like stock ETFs, could make market selloffs more severe as investors rush to sell, The Wall Street Journal reports. In fact, the problem potentially can be much worse in the bond market, which is much more heavily fragmented, and thus much less liquid, than the stock market.
While a given public company may have single class of common stock, it is likely to have issued dozens or even hundreds of different bonds and notes, each with a different interest rate, maturity date, and other terms, the Journal observes. Mass liquidations of ETF portfolios that are similarly fragmented across all these issues could have potentially catastrophic consequences for the bond market.