Global leaders in the fixed income exchange-traded funds market have collaborated to achieve a standardised methodology to improve valuation comparisons of fixed income ETFs as well as align global calculation approaches for key metrics such as yields, spreads and duration. The end goal is to enhance investor confidence in fixed income ETFs by improving intra-day analysis of different ETFs and other fixed income instruments across multiple trading platforms.

The team behind the initiative includes BlackRock, Bloomberg, State Street Global Advisors (SSGA), Tradeweb and a number of leading broker-dealers.

James Ross, executive vice president and global head of SPDR ETFs at State Street Global Advisors.

“Developing a global market standard for bond ETFs is critical for the future evolution of fixed income markets. Agreeing to a common language and framework improves investors’ ability to analyze bond ETFs relative to other fixed income instruments. This creates exciting new opportunities for bond investors to accelerate their use of ETFs,” said Mark Wiedman, Global Head of iShares at BlackRock.

Although the fixed income ETF universe has expanded greatly since its inception in 2002, to a current value of over $450bn, this only represents around 0.4% of the total global bond market. The adoption of this standardised methodology is expected to facilitate greater use of these funds by institutional investors, helping the continual expansion of the fixed income ETF market.

“While the growth of fixed income ETFs has been substantial in recent years, the institutional participation in this market has been slow to develop. One factor hindering institutional adoption has been the lack of standardization of a yield and spread calculation,” said Ben Macdonald, Bloomberg’s Global Head of Product. “In the future, we expect to see greater exposure to fixed income ETFs by institutional investors, and we have worked with the industry to develop this new methodology and the tools to help our customers identify investing opportunities.”

“Fixed income ETFs are in their early stages of growth as investors become better acquainted with their ability to provide efficient access to the global bond markets and their emergence as an indispensable portfolio management tool,” said James Ross, executive vice president and global head of SPDR ETFs at SSGA. “Establishing a standard fixed income ETF methodology for the calculation of yields, spreads and durations supports their growing importance while helping investors make more accurate product comparisons and improve portfolio construction.”

Due to the strict capital requirements and constraints in today’s financial environment, many institutions have begun to seek new ways to efficiently manage their cash and liquidity requirements. Fixed income ETFs have been highlighted as one type of product that will become increasingly relevant in this regard due to their ability to trade like equity. Standardisation of key metrics will further boost these funds’ liquidity status and allow for greater adoption for the purposes of cash and liquidity management.

“Since fixed income ETFs are increasingly being priced by bond desks, this initiative will make it considerably easier for traders to analyze and value these products,” said Lee Olesky, CEO at Tradeweb Markets. “Almost a third of our ETF volume is in fixed income-based products, and we see great potential for this segment of the market. This is an important initiative for the ETF industry, and another factor that will improve the market’s ecosystem and contribute to its growth.”

“In an environment with increasing capital requirements and constraints, investors are hungry for alternatives like fixed income ETFs to help them source liquidity. Standardization of key metrics is a critical precondition for fixed income products that trade more like equities,” added Brian Levine, head of Cross-Asset ETF products and co-head of Global Equites Trading at Goldman Sachs.

Fund information for single-currency fixed income ETFs offered by iShares and SSGA will be provided using the agreed methodology this autumn. Bloomberg, Tradeweb, and BlackRock’s risk and enterprise investment system Aladdin, will each use their analytics, trading and investment platforms to spearhead the popularisation of the new standard.