Q1 2016 saw record inflows into global fixed income ETFs, said BlackRock’s fixed income team at a briefing on Thursday. This year has been a tipping point for ETFs both in EMEA and the US due to a number of reasons, according to Matthew Tucker, head of Americas iShares fixed income strategy at BlackRock.
“No matter where you sit in the world you’re faced with very low rates and it’s a challenge getting yield. On the global sovereign bond market, $9 trillion now has negative rates, so about 36% of the market,” he said.
And second, it’s more challenging for every investor to trade bonds today. This has forced institutional investors to look at alternative ways to source liquidity, because brokers commit less capital to bonds, said Tucker. So the search for yield and liquidity are the two main drivers, he said.
In Europe the situation is particularly acute, according to Brett Pybus, head of iShares EMEA fixed income product strategy, given the negative rates in core European countries. “What that means is investors have to look for other ways to effectively get a less negative return,” he said. “Investors need to get more creative, open to more asset classes, or add more diversification to portfolios and have started moving from investment grade corporates into investment grade securities and high yield.”
In terms of usage, Pybus said that wealth or retail investors now use ETFs to build entire portfolios. “They’re also good for shorter term or tactical allocation type calls. From an institutional standpoint in particular, we’re seeing investors starting to view this product as just another tool that they’ve got when they look at trying to put a view into the market,” said Pybus. “Historically they might have thought of using a derivative, increasingly now we’re seeing ETFs being put into that mix,” he continued.
One of the criticisms Tucker hears the most from investors or reporters is that ETFs haven’t been tested yet and will face challenges when there a really stressful market. “But if you think about it, the first fixed income ETF was launched in 2002. Funds like the iShares IBOXX $ High Yield Corporate Bond ETF, have been in existence since 2007 so they’ve been through the financial crisis, the US treasury downgrade, the taper tantrum in the US, the high volatility last December, so there’s actually a number of periods. They’ve been stressed in just about every kind of imaginable market,” he said.