BOND ETFS AND THE PATH TO US$2 TRILLION

Until the first bond ETFs were pioneered in 2002, ordinary investors had few low-cost options for building diversified bond portfolios on their own, especially in areas such as corporate and emerging-market debt. It was either use a broker—who could spend hours or longer working with Wall Street dealers—or invest in a mutual fund. The first bond ETFs gave all investors efficient, convenient tools for targeting fixed income assets on each trading day.

Fast-forward to today and global bond ETF assets are growing 22% annually, more than three times the rate of open-end bond funds². Today, more than 1,800 bond ETFs trade across the globe³.

Even at US$1 trillion, bond ETF assets represent less than 1% of the US$105 trillion global fixed income marketplace.⁴ Growth is set to accelerate as all types of investors, from individuals to wealth managers to institutions, use bond ETFs in more and different ways. Today individual bonds are held largely by banks, central banks, and corporations—market participants that are just beginning to adopt bond ETFs.

BlackRock believes that global bond ETF assets are well positioned to reach US$2 trillion, by the end of 2024¹—thanks to four long-term trends

Early adopters used bond ETFs as buy-and-hold positions that replaced individual bonds, higher-cost mutual funds and separately managed accounts⁵.

Today, more investors are recognizing that, just as with stocks, bond ETFs are an efficient way to access different sources of potential return and manage risk. Individuals tend to use bond ETFs to build diversified portfolios across multiple asset classes, and term maturity bond⁶ ETFs to help generate income. Professional portfolio managers can use bond ETFs alongside individual securities in actively managed funds. Hedge funds can use ETFs for targeted long and short positions.

Most often, bond ETFs make it easy to build and manage fixed income allocations.

Institutions—pension funds, asset managers, and insurance companies—may rely on bond ETFs for quick, efficient market access.

Significant adoption by these investors traces back to 2008, when banks and broker-dealers pulled back from bond market-making amid the global financial crisis and its aftermath. Post-crisis regulation had increased the cost of capital, and investors found trading volumes and liquidity diminished just when they were needed most.

In contrast, bond ETFs traded continuously on exchange throughout and after the crisis, providing large investors with a much-needed alternative⁵. Institutional adoption drove higher trading volumes, which in turn provided the foundation for today’s liquid bond ETF market.

Bond trading has declined after the financial crisis, and investors have looked to ETFs and electronic trading to help improve liquidity. The bond ETF ecosystem has also evolved to enable rapid pricing and execution of individual bonds and, importantly, bond portfolios. Together these forces are contributing to a universe of bonds that are priced and traded daily—a virtuous circle that will support the growth of both bond ETFs and digital first transactions. These developments support future bond ETF growth, as well as entrench bond ETFs as part of a vibrant fixed income marketplace.

Finally, innovation runs strong as new types of bond ETFs emerge.

Demand for sustainable bond ETFs will likely grow as more people seek to match their personal values with their investments. More bond ETFs will incorporate environmental, social, and governance (ESG) inputs into their methodologies, or target green bonds used to fund sustainable projects, such as solar panels and clean transportation.

More investors are also likely to turn to the convenience of bond ETFs that seek to neutralize interest rate and currency risks. Currency-hedged bond ETFs, for example, can help investors dampen unintended volatility that comes with owning international bonds⁷.

Innovations in factor-based⁸ bond ETFs, now in the early stages, will continue to provide investors with new ways to calibrate portfolios, for instance by helping investors seek to balance credit and duration risk, or select bonds according to financial traits such as quality and value.

For all investors, bond ETFs offer transparent, simple and effective ways to assemble diversified bond portfolios. We believe the benefits will become clear to more and more investors, and the next leg of growth will be swifter and broader, with bond ETFs surpassing US$2 trillion by the end of 2024¹.

As with all innovative technologies, bond ETF adoption will be driven by greater recognition of their versatility and convenience. We envision a not too-distant future in which individual investors move beyond individual bonds, and more asset managers pursue active fixed income strategies with index tracking ETFs as building blocks.