Inflows into bond ETFs listed globally totalled $16.6bn in January – the most since February 2015 ($18.3bn) – as flows remain resilient to rising rates in the US. According to BlackRock’s iShares, the firm captured $7.8bn (47.0%) on total net inflows for the month, noting particularly high demand for ETFs tracking investment grade corporates, US Treasuries and emerging markets debt as investors positioned for the reflation trade.
Inflows into bond ETFs listed globally totalled $16.6bn in January – the most since February 2015 ($18.3bn).
As of the end of 2016, the global bond ETF industry had crossed $600bn in assets while the European bond ETF market surpassed $150bn.
The latest iShares report also highlights how bond investors are increasingly turning to ETFs through periods of elevated volatility and uncertainty – from Brexit to the US election – due to the substantial on-exchange liquidity provided by the funds. The graph below details the 20-Day average daily volume (ADV) of several of the largest iShares bond ETFs during 2016.
Further improving the liquidity profile of many ETFs, iShares notes the bond ETF options market in the US grew by 72% year over year, suggesting existing bond ETF users continue to embrace ETFs as part of a new set of investment tools, and not just as a fund. Bond ETF option open interest has grown to a notional value of $50bn in the US, as of 16 December 2016 – across sectors, the largest bond ETF option markets are high yield and government bonds.
Source: iShares.
While this application of ETFs is still nascent in Europe, iShares believes this is a growing area of interest.
While the majority of bond ETF options trades have historically been for downside protection, iShares notes that an increasing number of clients are using ETF options for a much wider range of applications from expressing outright views on volatility, to risk reversals and cross-sector volatility trading.
iShares believes going forward that the fixed income industry is ripe for disruption. The firm writes: “We expect bond ETFs to become more engrained as the tool investors – from funds buyers to bond buyers – look to form part, or in many cases the basis, of their bond allocations.
The global drive towards fee-based investment will continue to encourage investors to adopt a ‘value for money’ mentality, which we expect will in turn drive greater interest and use of ETFs among advisers, wealth managers and individuals.”
In terms of product development, iShares believes providers will continue to broaden the palette with a particular focus on smart beta fixed income ETFs and those incorporating environmental, social and governance (ESG) tilts.