By ETF Heat Map Team

In a changing financial ecosystem undergoing its own Darwinian evolution, fixed income advisors and investors are relying on bond ETFs, by investing more than a $100 billion (USD) into bond ETFs in 2016, to help them manage the growing problems of asset liquidity and a higher pressure for substantial positive returns in a historically low yield environment. Total investment into the ETF ecosystem rose to $3.4 trillion (USD), by the end of September 2016, which is up from $3 trillion at the end of 2015. Fixed income products make up slightly under one fifth of the total ETF ecosystem.

According to BlackRock, the largest market maker in the ETF space, $612 billion of ETFs are now backed by fixed income products. This represents 24% increase since the end of 2015 when $495 billion of ETFs backed by fixed income financial products existed. Exchange traded funds remain one of the most attractive and fastest growing fields within global finance.

Stephen Cohen, the head of fixed income beta at BlackRock, stated that, ”In this new ecosystem, bond ETFs are becoming really central to the way fixed income operates. In the old days if you wanted to own a portfolio of fixed income in order to deliver returns, owning lots and lots of bonds was actually quite straightforward. You could buy into and sell out of bonds quite easily. Now we are in a world where that becomes more and more challenging.”

oct-10_bondsInvestment into investment grade bond ETFs and emerging market bonds assets have increased by $33 billion and $15 billion to a total of $158 billion and $38 billion, respectively, so far this year.

Fixed income ETFs still represent a very small portion of the total funds within the ETF space where equity based ETFs are much larger and more prevalent. However, this growing trend of investments piling into fixed income bond ETFs is expected to continue. Antoine Lesne, the head of SPDR ETF Strategy and Research, stated that, “What we’ve noticed is a growing trend of investors going passive in the fixed income space.” Mr. Lesne mentioned that this trend was observed across all fixed income indices and not only limited to indices that would be classified as “easy to replicate.” Which means ETF providers such as Vanguard, Black Rock, and State Street are finding creative ways to create sophisticated ETF products. Fixed income ETFs are providing investors exposures to the European markets through UK and euro corporate bonds in addition to high yield and emerging market debt instruments.

Since fixed income ETFs only represent a small fraction of the total fixed income universe, there remains many other fixed income instruments that can be evolved and adapted to the ETF ecosystem. Investors should look forward to other ways the ETF ecosystem will continue to include fixed income products into this growing space within global finance.