BlackRock forecasts global investment in bond ETFs to reach $5.000 trillion by 2030. And a new generation of actively managed bond ETFs will be a strong contributor with expected 5x growth.
More attention to it bond ETF instrument on the part of investors it began a couple of years ago, in the midst of the pandemic crisis, so much so that they have placed them at the center of their portfolios.
Now Black Rock, the largest investment fund in the world, sees a further acceleration for this instrument as from seeing tripled within the next 8 years the assets under management Aum (Assets under management) of global bond ETFs up to the 5000 billions of dollars. THE new applications of bond ETFs drive the annual growth rate which stands at 23%.
“Bond ETFs have revolutionized fixed income investing by providing instant, transparently priced access to hundreds of bond market exposures in ways accessible to all investors,” he says. Salim Ramji, Global Head of ETFs and Index Investments at BlackRock.
It is investment instruments – says BlackRock- useful and durable under various market conditions, including environments characterized by close to zero interest rates, stressed market conditions related to pandemics and inflationary pressures. “Bond ETFs they have passed many tests and have become the catalyst for a more modern, more digital and more transparent bond market,” the fund says.
The extreme market volatility in the early days of the pandemic enhanced the versatility of bond ETFs. As a result, more investors have placed bond ETFs at the center of their portfolios in the past two years, and institutional adoption of bond ETFs has expanded, BlackRock says.
A third decade of growth for bond ETFs and a new wave is upon us.
BlackRock pioneered bond ETFs 20 years ago and that journey, which began with four products, led to 23% annual growth rate which is registered today from the bottom, eventually becoming a $1.700 trillion industry with over 1.400 products. Despite this growth, bond ETFs represent only the 2% of the $124.000 trillion fixed income asset class.
“The global bond ETF industry it is growing faster than we expected, thanks to a longer-lasting and stronger trend in the adoption of these tools by our customers during the pandemic era,” he said Carolyn Weinberg, Global Head of Product for ETFs and Index Investments. “We are at the gates of a new wave of growth. While much of this growth will come from increased adoption of existing products, we're excited about the innovations incorporating more active management, which we believe will increase five-fold to $1.000 trillion in assets by 2030.”
The trends that will make bond ETFs soar
BlackRock's new document “All systems go” identifies different trends that will help drive further adoption of bond ETFs, with details on trading dynamics, ETF usage patterns, market structure evolution, and strategies for implementing new investment themes, says BlockRock.
– Building blocks in 60/40 portfolios: Bond ETF market share in the fund sector is 24% versus 14% five years ago as more investors mix bond ETFs with active strategies, moving from one type of fixed income exposure to another, while redesigning the traditional 60/40 portfolio and bond construction.
– Tools for seeking active yields: Institutional clients, from pension funds to active managers, are among the fastest growing, as they turn to bond ETFs to adapt their portfolios to changing market conditions, facilitate pricing of individual bonds and portfolios, reduce transaction costs, manage liquidity and hedge risk.
– A further push comes from the recent ones regulatory changes in the United States, which put bond ETFs on a more equal footing with individual bonds and allow US insurers to use ETFs more freely. Eight of the top 10 US insurers use bond ETFs, and five of them started using them following market volatility since March 2020.
– Sources of potential return ever more precise: the number of bond ETFs available for trading has doubled since 2015 and the industry has broadened investor choice, from monitoring broad market segments to more targeted exposures by region, credit risk or maturity, to offering advanced strategies incorporating active management.
A new generation of bond ETFs
– Investors are implementing these strategies alongside traditional bond ETFs, individual bonds and other fixed income instruments: BlackRock believes that the next generation of actively managed bond ETFs could reach $1.000 trillion in AUM by 2030, up from about $200 billion today.
– Catalysts for modernization of bond markets: Changes in market structure following the 2008-2009 global financial crisis prompted the first wave of bond ETF adoption. Since then, the growth of bond ETFs and their ecosystem has helped drive advances in electronic trading and algorithmic pricing of individual bonds, improving the transparency and liquidity of the underlying bond markets. Electronic trading volumes of US investment grade bonds at the end of March 2022 represented 36% of total volumes traded for such bonds, up from 21% in early 2019.
– Meanwhile, the volumes of electronic trading of European corporate bonds grew by 61% between 2017 and 2020, reflecting the need for smaller institutions, such as asset managers and wealth managers, to seek alternative means of accessing the fixed income market.
