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FIXED INCOME ETFS: AN EVOLVING MARKET IN CHANGING TIMES
Trading in credit ETFs reached new heights as the Covid pandemic first took hold almost two years ago. So, how is the market working to retain its new investors? portfolio institutional spoke to iShares’ Natacha Blackman to find out.
Natacha Blackman, Director, Fixed Income product strategist, iShares EMEA
How has Europe’s fixed income ETF market evolved in the past year?
The adoption of fixed income ETFs has continued to advance, particularly by institutional investors, which has added to the diversity of the investor base. We saw a surge in usage during the Covid sell off in March 2020, which was a turn- ing point. There has been steady growth in ETF usage since. Net new business across the industry reached more than $41bn (£30.9bn) in the year to the end of November.¹
Aside from the growth in usage, there have been developments in the broader ecosystem around ETFs and ETF trading. The ETF borrow and repo market has continued to develop, for example, as has interest in options on fixing income ETFs.
What has driven these changes? There have been a few catalysts. An important one was the Covid sell off in March 2020, which was the first true test for fixed income ETFs in Europe. Another important development has been on the sell side, where fixed income ETF trading has merged with the more tradi- tional macro and credit-trading desk. This has happened alongside the continued electronification and automation of ETF trading. These developments have allowed for greater efficiencies with costs coming down as a result.
Better data is also available with trading vol- umes being reported by several analytics firms. This has enhanced investor confi- dence in the liquidity of fixed income ETFs. Finally, the continued growth of the ETF
16 | portfolio institutional | February 2022 | issue 110
lending market has supported the broader ecosystem, including the ETF options market, allowing investors and market makers more flexibility in how they trade fixed income ETFs.
How are institutional investors using fixed income ETFs in their portfolios? With the traditional role fixed income plays in portfolios being challenged by the low yield environment, investors are con- sidering new ways to reduce costs and generate additional sources of return. We are seeing institutional investors embrace a broader toolkit of index and portfolio- based products to source and hedge risks. This includes ETFs as well as index deriv- atives and portfolio trading. The main usages we see from institutional investors include tactical asset allocation and ETFs as the liquidity sleeve or as a derivative replacement. Fixed income ETFs are also being used more and more for ESG integration.
How did fixed income ETFs in Europe per- form during the volatility and uncertainty caused by the Covid pandemic?
Growth of Fixed Income ETF AUM
1000 1500 2000
500 0 2002 Global Bond ETF AUM AUM Forecast Sep 21 UCITS Bond ETF AUM Source: iShares 2024
There was a surge in trading. Daily vol- ume of fixed income ETFs across the industry in March 2020 averaged $5.3bn (£4bn), which was more than double the levels recorded a year earlier.² Records were broken for individual tick- ers, especially the largest and most liquid credit and emerging market ETFs. Investors turned to ETFs when underly- ing markets became opaque and illiquid. Individual bonds hardly traded during that time, while ETFs offered liquidity, immediacy and certainty of execution as well as price discovery benefits. Meanwhile, despite market volatility and the large outflows during March 2020, ETFs continued to track their bench- marks. They offered investors the long- term index return they are meant to. In this way, ETFs passed the test.
A fixed income ETF repo market has emerged. What impact has it had? The development of the repo market is helping investors use ETFs as long and short instruments, which is supportive of liquidity, as well as for the options market.
AUM ($m)
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