• The Growing Wave of Fixed Income ETFs
    May2019

    The growing trend of fixed income ETFs (“FI ETFs”) adoption has been unstoppable since late 2018. FI ETFs offer liquidity and flexibility for portfolio management in a cost efficient way, when compared to bonds and other fixed income products. In the coming years, when an increasing risk averse demand from the aging population kicks in, the potential of Asian FI ETFs should not to be underestimated.

    Institutions are increasing their allocation to FI ETFs in 2019. Stock market volatility driven by trade war and Fed rate hike expectations have led to the increasing adoption of fixed income products. Among these products, the FI ETFs attracted double of net inflows compared to last year. Globally listed fixed income ETFs and exchange-traded products saw net inflows of $23.7 billion in January 2019, compared with net inflows of $11.07 billion over the same period last year. 1

    Immense liquidity and flexibility
    FI ETFs offer edges in liquidity and flexibility in portfolio repositioning. During a volatile market, an asset manager who holds excess cash can make use of FI ETFs in several ways: gaining immediate exposure to a risk averse asset class and to markets where bonds cannot readily offer, or taking delivery of the individual bonds through redemption.2 FI ETFs offer flexible maturity, adjustable trading strategies and quick exposure to different markets and. These characteristics are crucial when investors need to manage duration and rate sensitivity quickly.

    Comparative advantage in cost efficiency
    FI ETFs are becoming more cost efficient when compared to bonds and mutual funds. On one hand, since financial crisis, regulatory reforms have led to significant reductions in the inventories of bonds. This renders building fixed income portfolios with individual bonds has become more costly and less efficient than in the past, encouraging investors to employ ETFs.3 On the other hand, when compared to actively traded mutual funds, ETFs are indexed and usually charging lower management fees and expense ratios. The cost efficiency of FI ETFs makes it excel.

    Expanding demand from aging population
    From a macro-economic perspective, the aging population may change the investors’ risk appetite unprecedentedly. Firstly, we all know investor’s risk appetite changes with age. Aged investors tend to look for smaller risk exposure. Secondly, the growth of aging population (assume age above 65) has leaped 32% in the past 10 years (655m in 2017 vs 497 m in 2007).4 When bringing both facts into consideration, it is expected to see a growing demand for liquid products with stable return like FI ETFs.

    The niche value of FI ETFs has been discovered by more and more investors. The increasing demand for the FI ETFs has started to be recognized by regulators and asset managers, which will lead to a rapid growth in the liquidity and accessibility of the product. There’s no a better time than now for all investors to consider adding FI ETFs into their portfolio.


    References :
    1 Capturing alpha in Asia’s ETF market – Trends to watch in 2019. (2019, March 19).
    Retrieved from https://www.risk.net/asset-management/6489246/capturing-alpha-in-asias-etf-market-trends-to-watch-in-2019

    2 O’Connor, D. (2019, February 2). Fixed Income ETFs: A Rising Tide?.
    Retrieved from https://blogs.cfainstitute.org/investor/2019/02/28/fixed-income-etfs-a-rising-tide/

    3 Flood, C. (2019, April 1). Investments in bond-based ETFs head for $1tn landmark.
    Retrieved from https://www.ft.com/content/a51c1b6c-3eab-11e9-9499-290979c9807a

    4 The World Bank.
    Retrieved from https://data.worldbank.org/indicator/SP.POP.65UP.TO?end=2017&start=1960&view=chart


     

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