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Why fixed income ETFs will continue to grow in 2018
Fixed income ETFs to grow despite challenging year for bond investors
Bayani S Cruz 22 Feb 2018

2018 is expected to be a challenging year for bond investors as economies strengthen and central banks continue to tighten monetary policy by raising interest rates. In addition, equities are expected to enjoy another good year, making them more attractive than fixed income.

Despite these scenarios, fixed income exchange traded funds (ETFs) are expected to continue growing in popularity and usage as they did in 2017.

The main reason is fixed income investors are now using ETFs as a means of accessing fixed income investments despite the challenges that are making investing in this asset class more difficult.

“We’re still seeing clients structurally shift into fixed income ETFs for various reasons like liquidity, like continuing to find their bank balance sheet to be more constrained, or because the fixed income market may be dislocated and more expensive to access. We’re seeing that evolution of growth from different segments of the market around trying to access fixed income liquidity in what has become an increasingly difficult environment for clients to navigate,” says Sean Cunningham, head of capital markets and fixed income for iShares, APAC.

In 2017, iShares fixed income ETFs benefited from this trend with net inflows for iShares’ fixed income products growing by 13%, with more than US$68 billion in new flows. Bond ETFs are on pace to hit US$1.5 trillion by 2022.

“More and more investors view bond ETFs as integral parts of a modern bond portfolio. Use of bond ETFs as trading instruments have expanded as bond markets continued to evolve from exclusively over-the-counter, dealer-intermediated trading to more open networks,” Cunningham says.

The growth of fixed income ETFs in 2017 follows a similar trend as 2016, when iShares fixed income ETFs saw net inflows of about US$7 billion from Asia-Pacific investors alone, Cunningham says.

The growth in fixed income ETFs in 2016 and 2017 happened despite the fact that equities were the favoured asset class, and this trend is expected to continue in 2018.

“We haven’t necessarily seen a drop in the usage of fixed income ETFs, which is obviously fine and very encouraging. We still think there’s a lot of way to go in terms of driving assets into these products, because they can offer the ability to access markets easier, not only to smaller clients but also to larger institutions,” Cunningham says.

With the strong appetite for ETFs across the board, iShares organic growth accelerated to 19% (US$246 billion) in 2017 over 2016’s 13% (US$140 billion) and pushing the industry’s total assets under management (AUM) past US$4.5 trillion.

Global investors drove record growth in US iShares ETFs, with net inflows of US$201 billion. iShares European UCITS ETFs also saw organic growth of 15% with a record US$41 billion of net inflows. European iShares funds crossed US$300 billion AUM this year, closing the year at US$359 billion.

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