How fixed income ETFs give investors an institutional edge

Justin Oliver from BMO GAM tells WP how fixed income ETFs have levelled the playing field for advisors and retail investors

How fixed income ETFs give investors an institutional edge

BMO Global Asset Management is the largest fixed income ETF provider in Canada and the eighth largest in the world*. Over the last decade, this leadership evolved through thoughtful creation of ETFs to meet the evolving needs of the market. Fixed income ETFs have levelled the playing field for advisors and retail investors, while also having created efficiencies for institutional investors. It’s within this environment that precise, diversified and cost effective access for all investors has become the catalyst for BMO’s ETF success.

The view of Justin Oliver, Director, ETFs, Institutional Sales and Service at BMO GAM, is that the democratization of the business means investors can now access the diversification, liquidity, choice and transparency of the fixed income market in any way they choose. Whether it is duration, credit quality or yield, retail investors can now pick the area of the market that suits their appetite without the operational complexities endured when buying single bonds in the past. As an example, BMO’s aggregate bond ETF charges nine basis points and holds almost 900 holdings, while trading at approximately $15 dollars on the exchange.

Oliver commented: “If you are a retail investor and you want to go and buy bonds, it is just not that easy; your minimum investment is somewhere along the line of $5,000 on a liquid bond. A less liquid bond, one that may achieve the investor’s desired outcome, in some cases may only be acquired by a $50,000 minimum investment.”

“However, the fractionalization of bonds into an ETF package has been an incredible step in accessibility to this area of the market.” 

“ETFs by nature are liquid, cost-effective and diversified vehicles that offer tax-effective ways of being transparent,” Oliver continued. “Over the past number of years, we have seen yields come down dramatically, making the returns from fixed income unattractive relative to their risk. Retail investors can, through ETFS, easily gain access and properly diversify their fixed income investments to get the intended outcome with desired risk.”

“It’s not just access and it’s not just liquidity; ETFs offer a diversified exposure. Using an ETF is far more efficient than picking a basket of bonds or analyzing active performance.”

As institutions continue to increase their use of fixed income ETFs, bond liquidity and requests for quotation (RFQs) continue to grow in number.

This second level of trading (from a buyer of an ETF to a seller of an ETF) eliminates the need for a trade in the underlying market, where spreads are over the counter (otc). This symbiotic relationship is one that will continue to help both institutions and retail investors as it becomes more entrenched over time.

“It comes down to operational capability: how effective can a team be at assessing the debt, credit, underlying merit or liquidity of every corporate bond, government bond, preferred share or high yield debt?” said Oliver. “At some points, gaining quick, diversified, cost effective and efficient access to that area of the market is better achieved through an ETF. This is true for both institutions and retail clients, and was definitely not achievable before ETFs existed.”

Oliver continued: “ETFs have taken something that was almost archaic in many ways, and made it work in the current environment. It is a win for everyone.” 

There are many examples over the years of a bond having a zero bid throughout a trading day or multiple bonds and high yield debt products not actively trading, either at the beginning or end of the day. Looking back at the financial crisis, many bonds (especially high yield) went zero bid for long periods of time. Throughout those periods, ETFs representing the market niches those bonds belonged too, continued to trade. 

Scale is another factor why Oliver believes ETFs offer retail investors an institutional edge. He highlighted BMO Emerging Market Bond ETF (ZEF), BMO Short Term US IG Corporate Bond (ZSU), and BMO Mid Term US IG Corporate Bond (ZMU) as products that allow investors to “travel the world on a budget”.

The trading costs to gain access to these regions would be prohibitively expensive for many regular investors. As a consequence, globally managed ETFs provide institutional level pricing that gets passed on to both advisors and retail investors.

The democratization of the business means all investors can gain access to the diversification, liquidity, choice and transparency of the aggregate fixed income market in any way they choose. The scalability of ETFs, which have been fractionalized into shares and can be acquired for less than $20 in many cases, helps retail clients create effective portfolios. ETFs are an ideal tool for allocating assets even within the smallest investment portfolio, while remaining efficient enough to be used by many institutions throughout the world.


*Source: BMO Asset Management Inc. As of February 28th, 2018

BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc., BMO Investments Inc., BMO Asset Management Corp. and BMO’s specialized investment management firms. BMO ETFs are administered and managed by BMO Asset Management Inc., an investment fund manager and portfolio manager and a separate legal entity from the Bank of Montreal.

This article is for information purposes. The information contained herein is not, and should not be construed as, investment advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the ETF Facts or prospectus before investing. Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated.

 “BMO (M-bar roundel symbol)” is a registered trademark of Bank of Montreal, used under licence


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