The global bond ETF industry achieved its best quarter on record with $44.5 billion of inflows during Q1 2017, according to analysis by BlackRock. The strong flows surpassed the previous record of $42.5bn set in Q1 2016, remaining resilient despite a widely anticipated Fed rate hike in March.
Stephen Cohen, head of fixed income beta at BlackRock.
BlackRock’s own ETF division iShares captured $20.3bn (45.6%) of total net inflows during the quarter.
Stephen Cohen, head of fixed income beta at BlackRock, highlighted some of the global trends seen across globally-listed bond ETFs since the start of the year. This included strong demand for US investment grade credit as positive economic data trumped the wide expectation of a Fed rate hike. The sector saw $14.4bn of inflows.
Maintaining the trend which emerged from the end of last year, investors continued to use inflation-linked exposures such as Treasury Inflation Protected Securities (TIPS) ETFs to protect portfolios against potential increases in inflation. Globally these funds attracted $3.6bn in flows during the first quarter.
Following the US election, emerging market bond and equity ETFs saw large outflows driven by concerns over a rise in protectionism. This year, however, Cohen notes the situation has reversed with inflows intensifying over March and reaching $15.6bn for the quarter. BlackRock also found that while US investors were happier with hard currency exposures, European investors were indifferent between dollar and local currency-denominated emerging markets debt. Within the iShares European range, emerging market debt ETFs – both local currency and hard currency – experienced the largest inflows of any asset class year to date.
Looking ahead, Cohen expects the trend towards US investment grade credit to continue into the second quarter, driven by yield differentials between the US and Europe.
Cohen also argues for increasing demand for bond ETFs in general, driven by greater incorporation of passive products into active investment strategies. He writes: “As investors continue to combine active and index exposures to create portfolios that achieve their intended outcomes, we expect a change in mind set that positions ETFs as part of the ‘active investing’ continuum.
“Investors are actively choosing from a variety of tools, including ETFs, to implement investment strategies, achieve return targets, manage risk levels and control costs. ETFs offer ‘markets on demand’ – liquid, cost efficient access to a variety of different market exposures.”
The options ecosystem around large bond ETFs in particular is expected to continue growing, as an increasing body of investors seek to hedge or enhance return opportunities. “Options activity on bond ETFs is flourishing, and we expect this to continue,” writes Cohen. “While more developed in the US we are seeing strengthening demand in Europe.”