Bond mania a goldmine for BlackRock's fixed-income ETFs

Perception of bond ETFs has changed as investors get more creative

Bond mania a goldmine for BlackRock's fixed-income ETFs

BlackRock is benefiting from the rising trend of asset managers and wealth managers adopting exchange-traded funds (ETFs) instead of, or in addition to, directly purchasing bonds. As the largest money manager in the world, BlackRock's fixed-income ETFs had net inflows of US$146 billion from March of last year to the end of January, compared to US$134 billion for competitors.

After a year in which its total assets under management decreased by almost 15% to $8.6 trillion, bond ETFs have been a bright light for BlackRock. According to BlackRock, by 2030, the total value of its bond ETF holdings would have more than doubled, from $1.8 trillion to $5 trillion.

Regulatory changes, investors' increased familiarity with how they perform in choppy markets, and inventive uses of them by wealth managers, and even other bond funds, are all contributing to the gains.

“There have been significant changes about the way people think about fixed-income ETFs in the past year,” said Deborah Fuhr, founder of the ETFGI consultancy. “We have seen large funds and asset managers put their portfolios in ETFs . . . rather than buying bonds and trying to manage them themselves.”

“It’s a continuing trend. Once [people] have used an ETF, then they use them more and in different ways.”

BlackRock has been the category's dominant player since it first entered the market, with more than 40% of the market's total assets under management for fixed-income ETFs. Yet, it extended into new sectors as competition for broad-based and retail-focused ETFs increased.

ETFs such as IBTG, which exclusively owns US Treasury bonds due in 2026, and LQDB, which only holds BBB-rated corporate bonds, are examples of the minor slices. Because of this, active fund managers can utilise them in several ways.

Depending on their outlook for the economy, some investors employ a certain slice of their portfolio to bias it towards longer or shorter duration bonds. When they get substantial inflows, some utilize BlackRock's AGG wide index fund as a holding tank to invest the money directly and give their active managers time to choose the correct bonds.

With the failure of numerous oil and gas businesses in 2015, professional investor interest in bond ETFs suddenly began to increase. As a result of the ETFs’ closer tracking of the high-yield bond market at the time, shorting the high-yield bond ETF from BlackRock proved to be a more effective hedge against junk bond defaults than purchasing an index of credit default swaps.

The adoption of these products has also been influenced by regulatory change. Beginning in December 2021, New York state regulators began allowing insurers to use passive fixed-income ETFs the same way they handle bonds when determining capital requirements. It increased the products' appeal to a large segment of the sector, and other states have done the same.

According to Salim Ramji, head of ETF and index investments for BlackRock globally, eight of the top 10 US insurance firms and nine of the top 10 active managers utilize BlackRock ETFs. Money managers who argue that it is difficult for them to invest in another company's passive funds since they are active investors are sceptical of the trend.

Vanguard, the closest competitor to BlackRock, has chosen a very different course of action.

From 38 fixed income ETFs with $150 billion in assets in 2017, it now offers 48 with $389 billion in assets. The Pennsylvania-based organization, which mostly serves retail clients, claimed it chose to customize its selection to reflect "investor preference for low-cost, broadly diversified fixed income ETFs”.

Nonetheless, because to the nature of bond ETFs, many fixed-income investors claim that their rise has fundamentally improved the market. On exchanges, ETF shares trade continuously throughout the day, and more than 80% of bond ETF trades may be executed without needing the purchase or sale of the underlying assets, adding to the liquidity.

The market makers who purchase and sell the real bonds that support ETFs have also become more used to pricing big quantities of securities. ETFs may reduce the cost of purchasing high-yield corporate bonds from about 60-80 basis points to 15 or 20 basis points, according to Manuel Hayes, senior credit portfolio manager at Insight Investing.

ETFs are here to stay and they are evolving. If you overlook it, you are missing half the market,” Hayes said.