The global bond ETF industry also achieved strong results in the second quarter of 2017 with $43,3 billion in inflows, slightly below the first quarter's record, when fixed income ETF inflows were equal to 44,5 billion dollars.
Globally, it raised $21 billion in the second quarter, driven by investor interest in investment grade credit, emerging market debt and government bond funds.
DEMAND FOR EMERGING MARKETS DEBT (EMD)
Driven by the search for yield, emerging market bond ETFs saw net inflows of $7,5 billion globally in the second quarter. Similar to the first quarter, US investors favored hard currency debt exposures, while European investors leaned towards both hard and local currency funds. This trend eased at the start of the third quarter as investors are reducing their allocations in reaction to recent comments from the Central Bank and rising US Treasury yields.
Globally in 2017 we saw strong demand for dollar-denominated debt. Among European investors, the month of June marked a significant demand for corporate bonds.
Investors get creative – working with ETFs as a way to access the wider market, many investors are looking for new ways and contexts to use ETFs, for example:
– Lending ETF units to increase incremental income and have a more profitable portfolio.
– Combine ETFs with derivative contracts to achieve target exposures, e.g. use interest rate futures to hedge interest rates for broad corporate bond ETFs, creating exposure to credit spreads;
– Increased use of options on ETFs, e.g. Investors add ETF options to portfolios as a hedge against potential volatility.
NET FLOWS IN BOND ETFs (BILLION DOLLARS)
TOP 3 MYTHS ABOUT BOND ETFs
Client inquiries received in 2Q addressing common ETF concerns
1. I've heard that ETFs can be more difficult to trade than investors realize, with potentially high losses in the event of a significant liquidation. It is true?
In times of market stress, iShares ETFs are as liquid as the underlying bond market. ETFs make it easier to trade bonds, including high yield and emerging market bonds, in all market conditions by allowing investors to buy and sell efficiently, with price transparency. ETFs allow investors full visibility into buy and sell trades. Like all listed stocks, investors can see and access the stock's price or liquidity. This visibility is particularly important when the market is under pressure. Since ETFs trade on exchanges like stocks, multiple buyers and sellers can connect simultaneously without having to trade in the underlying bond market.
2. Do ETFs exacerbate crowd behavior, and therefore distort valuations?
The market is driven by investor sentiment and not by ETFs. An increase in demand for global equities is the catalyst for market growth, impacting a wide variety of investment vehicles.
While the popularity of ETFs is growing rapidly as more investors with different investment horizons, risk profiles and portfolio goals discover their benefits, assets invested in ETFs still represent a tiny fraction of the global market for equities, bonds and commodity. It is worth bearing in mind that global bond ETFs represent less than 1% of the capitalization of the entire bond market and less than 3% in segments such as high yield.
3. Are ETFs subject to greater losses than individual bonds in a rising rate scenario?
Many investors choose to hold individual bonds over ETFs because they believe bond ETFs are exposed to losses in rising rate scenarios. In truth, ETFs can help investors navigate rising rate scenarios because:
– Individual bond strategies, such as holding bonds to maturity or selling them at a loss to reinvest in higher yielding bonds, may not substantially protect investors from the effects of rising rates.
– ETF yield can help offset the stock price shock in terms of absolute return.
– Fixed income segments do not react uniformly to rate hikes, so diversification plays a key role.
LOOKING AT 3Q
REGULATION AS A CATALYST
In Europe, we expect MiFID II to catalyze interest in indexing and ETFs, as a result of increased cost transparency, a ban on retrocessions and the introduction of transaction reporting requirements. The trend is set to continue in the coming months as asset managers and advisors look to lower management costs and scalable components to portfolio construction, with ETFs and index funds suitable for this purpose.
US DOLLAR FUNDS REMAIN POPULAR OUTSIDE THE US
International investors continue to drive demand for US dollar assets despite the cost of currency hedging. We expect demand for currency hedging products to continue especially in the European markets.
BOND ETFs are 15 years old
Fifteen years ago, the debut of the first bond ETF changed the way investors access the fixed income market. Initially, only 4 iShares bond ETFs were available, with low invested assets and limited access to US treasuries and investment grade credit. There are currently over 300 bond ETFs in the US with over $500 billion in assets under management, providing access to all sectors of the bond market.
Source for all data in the document: Global ETF Industry Data from BlackRock Business Intelligence, as of June 30, 2017.
