Global bond exchange-traded funds (ETFs), though operating in the most challenging fixed-income market in decades, will triple their assets under management to US$5 trillion by 2030, according to BlackRock.

The extreme market volatility in the early days of the pandemic reinforced the versatility of bond ETFs, the world’s largest asset manager says in a new paper, All Systems Go, published on May 19. As a result, over the past two years more wealth managers have put bond ETFs at the centre of their portfolios and institutional adoption of bond ETFs has broadened and deepened.

“Bond ETFs have revolutionized fixed-income investing as they provide instant access at transparent prices to hundreds of bond market exposures in ways that are accessible to all investors,” notes Salim Ramji, global head of ETF and index investments at BlackRock. “Bond ETFs have grown by proving to be useful and resilient investment tools during various market conditions including near-zero interest rates, pandemic-related market stresses and inflationary pressures. Bond ETFs have overcome many tests, and they have become the catalyst of a more modern, more digital and more transparent bond market.”

Bond ETFs, which BlackRock pioneered 20 years ago, have grown 23% annually into a US$1.7 trillion industry with more than 1,400 products. Despite this growth, bond ETFs comprise just 2% of the US$124 trillion fixed-income asset class.

Darren Wills, head of APAC iShares fixed income and institutional index, says investors in Asia-Pacific continue to adopt bond ETFs as they provide transparent, liquid, and precise access to global fixed-income markets. “Ongoing innovation that incorporates sustainability alongside new exposures to local fixed-income markets is set to accelerate that trend,” he notes. “ETFs currently account for just 0.5% of the total APAC bond market – and we believe the region has a major role to play in driving growth of global bond ETF assets.”

BlackRock identifies four factors that it believes will help drive further adoption of bond ETFs. These are:

• Building blocks in evolved 60/40 portfolios. Bond ETFs’ market share in the fund industry is 24% compared to 14% five years ago as more investors are blending bond ETFs with active strategies, moving from one type of fixed-income exposure to another, reframing the traditional 60/40 (stocks vs bonds) portfolio construction in the process.
• Tools for seeking active returns. Institutional clients – from pensions funds to active managers – are among the fastest-growing adopters as they turn to bond ETFs to adapt their portfolios to changing market conditions, price individual bonds and portfolios, reduce transaction costs, manage liquidity, and hedge risk.
• Increasingly precise sources of potential returns. The number of bond ETFs available to trade has doubled since 2015 with the industry expanding investor choice from tracking broad market segments to providing more targeted exposures by region, credit risk or maturity to offering advanced strategies that incorporate active management. BlackRock says this next generation of more active bond ETFs can reach US$1 trillion in AuM by 2030, up from about US$200 billion today.
• Catalysts for modernizing bond markets. The growth of bond ETFs and their ecosystem has helped drive advances in electronic trading and algorithmic pricing of individual bonds, improving transparency and liquidity in underlying bond markets. Electronic trading volumes in US investment-grade bonds at the end of March 2022 accounted for 36% of total traded volumes for those bonds, up from 21% in early 2019. Meanwhile, electronic trading volumes of European corporate bonds grew 61% between 2017 and 2020.