Fixed Income ETFs: Investors’ Ticket to Flexibility

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Fixed Income ETFs: Investors’ Ticket to Flexibility

When market volatility surges, fixed income investors encounter multiple pressure points. For example, they may face difficulties with liquidity, price discovery, and transaction costs.

In this infographic from iShares, we show how fixed income ETFs help address these challenges. It’s the second in a five-part series covering key insights from the ETF Snapshot, a comprehensive report on how institutional investors manage volatility.

The Methodology

To assess the role that ETFs play, Institutional Investor published a report in 2021 based on a survey of 766 decision makers. Respondents were from various types of organizations, firm sizes, and regions.

For instance, here is how responses broke down by location:

• 21% Asia Pacific
• 36% North America
• 29% Europe, Middle East and Africa
• 14% Latin America

Here’s what the survey found.

Encountering Roadblocks

During 2020 market volatility, the vast majority of institutional investors said they had difficulty sourcing (95%) and/or transacting (92%) in individual bonds.

Smaller firms faced these roadblock more often than larger institutions.

How did institutional investors overcome these liquidity challenges?

Turning to Fixed income ETFs

More than half of institutions increased their use of ETFs as they looked to source, price, and transact bonds. In fact, in the first three months of 2020, fixed income ETF trading volume reached $1.3 trillion—half of 2019’s total.

ETFs also became more popular relative to their underlying basket of securities. During extreme volatility in April 2020, ETF trading volume relative to the underlying securities was three times higher than the 2019-2020 average.

With their higher liquidity, ETFs also helped institutional investors with price discovery.

“When there was no trading activity in certain corporate bonds, you can use the ETFs as a pretty good proxy for what people are willing to pay and what the appetite is.”
—Senior Analyst, Asset Management firm

However, the usefulness of fixed income ETFs goes far beyond liquidity.

A Versatile Tool

Institutional investors said fixed income ETFs were a good replacement for individual bonds for a number of reasons.

The difference in transaction costs is particularly evident in the fixed income landscape. During extreme market volatility in March 2020, the bid-ask spread* for the iShares High Yield Corporate Bond ETF was 48 times smaller than the underlying securities.

* A bid-ask spread measures the difference between what an investor is willing to buy a fund for (the bid price) and the price an investor is willing to sell for (the ask price). A smaller bid-ask spread indicates greater cost efficiency.

In light of these attributes, fixed income ETFs are a go-to tool for institutional investors. In fact, they were top-rated for a number of use cases.

One senior analyst at an asset management firm noted that it was easy to get granular with asset allocation because there are so many ETFs with plenty of liquidity.

The Future of Fixed Income ETFs

As of May 2021, fixed income ETFs made up 18% of all ETF assets under management. It’s likely that their role could become more prominent in the future.

For instance, 34% of institutional investors are likely to increase their use of fixed income ETFs going forward. One thing is evident: fixed income ETFs have proven to be flexible tools, especially during heightened market volatility.

​​Download the ETF snapshot for free.