Fixed Income ETFs growth: An unstoppable trend?

2019 was a record year for Fixed Income ETFs. Globally, Fixed Income ETFs attracted $240bn in net new assets, bringing total Fixed Income ETF Assets under Management (AUM) to more than $1.3trn. Overall, Fixed Income ETFs have seen a decade of outstanding growth on the back of broader investor acceptance. Fixed Income ETFs have seen net global outflows in only 15 of 185 months since 2005.

Even in light of the most recent episode of market volatility, Fixed Income ETF flow momentum has been strong. Despite posting $35bn of outflows during the period of heightened volatility in March, Fixed Income ETFs collected over $60bn in net new assets between January and end-May 2020 – equivalent to more than three years of cumulative Fixed Income ETF inflows in 2005-8.

Some of the drivers behind this success story are well known. Fixed Income ETFs provide standardised, affordable, granular access to the bond market, a market where over-the-counter (OTC) trading, associated transaction costs and large denominations create major hurdles for diversified, direct bond investments. It is also established that the on-exchange nature of ETFs allows for transparent pricing and gives investors opportunities to implement their ideas quickly and efficiently, while also adding liquidity to an otherwise fragmented market.

We argue that Fixed Income ETF growth is anchored in solid fundamental trends and is here to stay. Over time, technological, index and market infrastructure difficulties, which had been seen as obstacles to growth, have been successfully addressed. As what looks like another decade of ultra-low interest rates begins, there will be even fewer alternatives to efficient Fixed Income allocation. In this paper we discuss five ways in which Fixed Income ETFs have, in our view, passed the test. And this is only the beginning. As of end-May 2020, with global Fixed Income ETF AUM of $1.37trn, ETF ownership of the global Fixed Income market comes to only an estimated 2%[1]. The scope for further growth in Fixed Income ETFs is huge.

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1. Based on Bloomberg ETF search, bond market size based on Bloomberg Barclays Multiverse (LF93TRUU Index)

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