QUALITY THE WAY YOU WANT IT

Quality the Way You Want It

Amidst the market noise and volatility in fixed income, investment grade bond ETFs have quietly gone about their business, seeing inflows every month last year and emerging as 2024’s third highest fixed income flow gatherer. With the momentum carrying into 2025, reflecting a preference for quality as the broad reallocation to fixed income continues, this month, we showcase the extensive range of investment grade bond ETFs available.

The global investment grade ETF toolkit

Investment grade ETFs are increasingly becoming the tool of choice for investors allocating to the sector, now comprising over 35% of the total AUM of investment grade funds from just over 15% a decade ago. Today, staying in high quality does not mean that investors cannot go granular within the sector. In investment grade alone, investors are able to use ETFs to slice and dice their allocation by geographical preferences, or express duration views across the curve through maturity bucketed exposures.

Room for relative value trades

While overall spreads are still near lows not seen in years after a 2024 for credit markets marked by spread compression, all-in yields remain attractive compared to the last decade. Historically, Asia and EUR IG spreads have traded inside of USD IG spreads, before diverging from 2022 onwards where Asia IG trended tighter and EUR IG widened. With each geographical market having a distinct profile, investors can find opportunities to balance duration and spread exposure through different markets.

Hedging for gains?

For a USD-based investor, currency hedging can protect against FX risk and minimize volatility in returns driven by currency fluctuations. At the same time, the negative interest rate differential between the US and most other global markets (including EUR) means that hedging back to the USD currently still offers positive carry through a yield pickup. Investors today can use USD-hedged ETF share classes to achieve a significantly higher yield to volatility ratio in their exposures.

No Time to Yield

A case for putting cash to work with bond ETFs

Last year, our whitepaper “The Great Yield Reset” discussed the generational opportunity for investors to rethink their portfolios with a greater focus on fixed income.

In our latest paper “No Time to Yield”, we highlight our updated expectation that global bond ETFs will reach US$6 trillion in AUM by 2030. We discuss the opportunity within bonds and why investors may want to consider moving now to capture decades high yields, get cash off the sidelines, and employ efficient, precise tools such as bond ETFs in this new market regime.

As investors take a more dynamic approach to asset allocation, we believe bond ETFs are among the most powerful tools within the investor tool kit to navigate this market environment.

The timing of potential interest rate cuts may be uneven worldwide, but the message is clear: Don’t wait. 

Source: BlackRock, “No Time to Yield”, as of April 2024. There is no guarantee that any forecasts made will come to pass. 

Key themes we discuss in this piece:

1. Time to put cash to work and capture higher rates Yields are higher today than they have been in years. If inflation indicators continue to fall, the time of elevated cash rates may be drawing to a close.
2. Investors are choosing bond ETFs in record numbers, but they have room to do more Many investors are still significantly underweight to fixed income, with a 22% average allocation, based on total global industry AUM, far below the “60/40” portfolio allocation often referenced in balanced portfolio discussions.
3. Now is the time to move Even with ongoing volatility in economic data and bond markets, we believe it’s time for investors to move because, historically, the market has tended to price in rate actions before they occur.

Index Your Bonds with Asia Credit

Asia bond markets definitely have a part to play in the next leg of growth in index and ETF adoption. As investors continue to move beyond the “active versus passive” debate, constant product innovation will offer increasingly precise sources of potential returns, and help lead more investors to embrace bond index building blocks alongside high conviction active strategies in pursuit of optimal portfolio outcomes.

In this Asia-focused “Index Your Bonds” paper, we spotlight iShares Asia Credit exposures, provide insights on how they are managed in practice, and discuss how innovations such as ESG integration will make indexing an integral part of investing in Asia fixed income.