Bond ETFs have enjoyed massive popularity over the past few years and total assets now already stand at $750bn, but BlackRock is predicting this figure could double by 2022 as demand continues to grow.
In the third quarter of 2017, investors were attracted primarily to riskier parts of the fixed income market, as global growth remained remarkably steady and strong, while market volatility has been at a stubbornly low level.
US investment grade corporate bond ETFs have seen $9.4bn of inflows during the three months, according to BlackRock; Treasuries drew in $7bn, and multi-sector fixed income ETFs attracted $5.8bn in flows. US high yield ETFs were also popular, taking in $4.9bn.
As the table below shows, inflows into developed bond ETFs have continued throughout the past year, according to TrackInsight data, despite the underperformance of the asset class over recent months.
Meanwhile, investors were also drawn to emerging market debt (EMD) products, which saw increased flows after a summer lull. Year-to-date, the sector’s ETFs have taken in $16bn, with both local and hard currency exposures seeing roughly equal demand.
European investors were particularly keen on hard currency EMD ETFs in Q3, while local currency products saw demand from both European and US buyers, marking a shift for US investors, who largely allocated to hard currently EMD products earlier in the year.
Year-to-date, US investor demand for bond ETFs has grown substantially compared to 2016; they have poured $47.8bn into bond products over the first three quarters, exceeding the $38.1bn of inflows during the entirety of 2016.
However, European investor demand for bond ETFs was lower than during 2016, with inflows of $10.4bn over the first three months of this year coming in at just under half of 2016’s total of $21bn.
Despite this, BlackRock believes total assets in bond ETFs are on track to reach $1.5trn in just than five years, as the variety and quality of fixed income products continues to grow.
As central banks are about to embark on a tapering programme, with the ECB expected to begin unwinding QE, the Federal Reserve already on a rate raising cycle, and the Bank of England expected to raise rates to battle inflation, investors will be paying close allocation to their bond allocations, and ETFs may well be the vehicles to allow them the flexibility they need.