Visualizing the Meteoric Rise of Bond ETFs

Visualizing the Meteoric Rise of Bond ETFs

Bonds are a staple in almost any investment portfolio — but up until very recently, they weren’t exactly the easiest thing to own.

Despite the bond market being bigger than the equities market, bonds mostly trade over-the-counter (OTC) and not on any centralized exchange.

In fact, traders mostly swapped bonds over the phone, negotiating prices and making deals. However, this “old school” approach came with several disadvantages, including high transaction costs, illiquidity, and a lack of true transparency in the market.

A New Way to Play

Today’s infographic comes to us from iShares, and it shows that over the last two decades, the bond market has been dramatically transformed and democratized from the “old school” approach that relied on phones, traders, and giant bond calculators.

The biggest factor in this transition: the use of exchange-traded funds (ETFs) in the bond market, which just hit a new global milestone of $1 trillion of AUM in June 2019.

Let’s look at the journey of how this rapidly rising segment of the market took off, the factors driving it, and what the future may hold for Bond ETFs.

Bond ETFs: Journey to $1 Trillion

Below is a year-by-year account of new innovations in bond ETFs, and how the usage of them has changed over time:

2002: New tech

A new financial technology, the ETF, shakes up the bond market for the first time – and the first fixed income ETFs launch in the United States.

2003: More variety

Just one year in, and there are already numerous types of bond ETFs that allow investors to fulfill different portfolio needs:

• Government bond ETFs
• TIPS ETFs
• Corporate bond ETFs
• Aggregate bond ETFs

2006: Achievement unlocked

The global bond ETF industry hits $25 billion in AUM.

2007: Bond ETF innovations

The bond ETF universe continues to expand as investors demand even more options:

• Mortgage-backed security bond ETFs
• Muni bond ETFs
• High yield bond ETFs

2008: A new source of liquidity

Liquidity for individual bonds dries up during the 2008 Financial Crisis. However, bond ETFs step up to the plate by providing a new source of liquidity and volume increases, allowing investors to efficiently access fixed income markets.

2010: More precise strategies

The first term-maturity ETFs launch. These special bond ETFs specifically hold bonds that all mature in the exact same year.

2012: Achievement unlocked

The global bond ETF industry hits $250 billion in AUM.

2015: More product innovation

At this time, factor-based bond ETFs start to hit the mainstream. These use a rules-based approach to employ multiple investment factors, such as low volatility, quality, value, or momentum.

2016: Achievement unlocked

The global bond ETF industry hits $500 billion in AUM.

2017: Green bonds

Green bonds ETFs provide investors with the ability to invest in bonds that are tied to sustainability purposes.

2018: Market volatility and bond ETFs

In the second half of 2018, markets get volatile and investors turn to bond ETFs to help reduce their overall portfolio risk, specifically diversifying their exposure to stocks.

2019: Achievement unlocked

The global bond ETF industry hits $1 trillion in AUM, with now over 1,300 bond ETFs available.

The Path to $2 Trillion?

In just 17 years, bond ETFs have grown to be a significant part of the investment universe, reaching $1 trillion AUM in 2019.

Impressively, it won’t likely take long to double the last milestone. According to BlackRock, it’s anticipated that ETFs will hold $2 trillion in AUM by the year 2024 — just a few short years down the road.