Bond ETFs could top $2trn by 2024, says BlackRock

Bond ETFs are seeing an increase in interest from investors, so much so that the fixed-income sector could almost double in less than four years, according to the world’s largest asset manager BlackRock.

Institutional investors such as pension funds and insurance companies are embracing bond exchange-traded funds to offset some of the damage done by the looming coronavirus pandemic, the money manager said in a report on Wednesday.

First-time buyers of BlackRock’s iShares bond ETFs contributed roughly $10bn in inflows during the first half of 2020, according to the firm. The shift comes at the expense of individual bonds and other fixed-income instruments and is projected to help assets in fixed-income ETFs to top $2trn globally by 2024, from the current $1.3trn, BlackRock said.

Bond ETFs gained ground in March on their high trading-volume and price-discovery aspects, which helped solidify their place in institutional portfolios, according to Carolyn Weinberg, iShares global head of product.

“We needed a market event for some of the skeptics or institutions who theorized that they wouldn’t work to show and demonstrate that ETFs are important and critical tools,” she told Bloomberg. “It’s more challenging and likely more costly to find the individual bonds quickly and buy them in a time of market stress.”

As trading froze across bond markets in March due to volatility, fixed-income ETFs — which trade on exchanges and behave like stocks — acted as an exit route of sorts, with the funds selling off more quickly than their harder-to-unload holdings.

BlackRock’s $57bn iShares iBoxx $ Investment Grade Corporate Bond ETF — the biggest credit ETF — saw an average day trading volume that was 7.5 times greater than that of its five largest bond holdings from February through April. In the $28 billion iShares iBoxx High Yield Corporate Bond ETF, it was 25 times greater.

“ETFs are playing an increasing role in providing secondary market liquidity, which was on display during the recent volatility,” S&P Global analysts wrote in a report last week. “Record ETF volumes helped to support liquidity and, importantly, provide price discovery.”

Currently, we are observing insurance companies stepping up activity in the space. S&P Dow Jones data show that insurers bought more than $3.4bn worth of bond ETFs in the first three months of 2020, versus about $600 million worth of equity ETFs. The ETFs were likely easier to access amid the height of the turmoil, according to CFRA Research.

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