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in this market already. As institutional usage of bond ETFs continues to drive over- all bond ETF market growth, schemes look- ing to use them will benefit from increased volumes and depths, and thus larger sizes can be traded at low cost, relative to trans- acting in the underlying market. We have seen larger trade volumes as a result of MiFID II, which has resulted in a
significant enhancement in the reporting and transparency of overall secondary mar- ket activity. To put this into context, more than 75% of the average daily volume recorded since January 2018 has been recorded on over-the-counter venues (see figure 1). Already, the enhanced reporting of ETF trades has enabled larger ETF trans- actions. The largest trade in a European
Figure 1: EMEA bond ETF range spread & turnover by trading venue
50 60 70 80 90
10 20 30 40
0 75 67 69 59 62 79 69 77 72 74 73 76 68
10 12 14 16 18 20
0 2 4 6 8
On-exchange
Off-exchange
Spread Source: Volume data – Bloomberg 31 Aug 2019; spread data – Onetick 31 Sept 2019
bond ETF to date, worth $550m (£425.8m), took place in January 2019.⁴ In normal market conditions, market makers can ena- ble cost-effective and sizeable trades into and out of credit ETFs. In times of stress, being able to transfer risk, whether to get out of positions or to increase allocations when prices are depressed, is crucial. ETFs can serve as an efficient, open-access vehi- cle for investors. Furthermore, they provide price transparency in the underlying bond market when it seizes due to closure or a lack of liquidity in the primary market. Pension schemes are faced with a plethora of challenges in meeting their primary objective of being sufficiently funded to make member benefit payments. The time is now to seek new efficiencies, especially for those schemes underfunded in a lower for longer environment. Bond ETFs, when used and traded in the right way, can be an effective tool when applied to pension scheme portfolios. We believe this is the time for schemes to consider adding bond ETFs to the tool kit.
1) Source: BlackRock, the Exchange Traded Product Landscape. 2) Source: Bloomberg and BlackRock 2019. 3) Source: BlackRock, Primed for Growth: Bond ETFs and the path to $2trn. 4 Source: Bloomberg, Tradeweb, IHS Markit. Prints reflect the largest known trades on iShares UCITS Credit and ETFs as of August 2019 across exchange and over-the-counter trading venues.
Issue 89 | December-January 2020 | portfolio institutional | 17
Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19
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