Fixed Income ETFs Are on the Rise

Institutional investors are increasingly using fixed income exchange traded funds (ETFs), finds a report from Greenwich Associates, sponsored by BlackRock’s iShares.

The survey found that nearly half of institutional managers and 38% of institutional funds plan to increase their fixed income ETF investments in the next 12 months. Out of those who currently do not use ETFs but plan to do so in the coming year, 67% plan to allocate 6-10% of their fixed income portfolio to ETFs.

As for those who aren’t using ETFs, the reasons include “investment guidelines not allowing ETFs, lack of understanding about liquidity and all-in costs, and low levels of sell-side coverage. Greenwich sees the barriers to adoption will ‘inevitably weaken’ as ETF use continues to gain momentum,” the report says.

For those who do allocate to ETFs currently, 60% allocate 10% or more to fixed income ETFs. 85% of these have users have invested in fixed income ETFs for at least two years, and 66% of users have increased their usage since 2011.
As for why fixed income ETFs are on the rise, institutions say that ease of use and liquidity are the main reasons, at 81% and 80% respectively.

“Institutions are re-examining their fixed income portfolios in light of an evolving market that is characterized by increased volatility, decreased liquidity and more challenging access. These trends are leading investors increasingly to fixed income ETFs as a way to source exposures, harness liquidity and efficiently implement desired investment strategies,” says Matthew Tucker, head of iShares Fixed Income Investment Strategy at BlackRock.