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Bond ETFs set for more innovation as demand grows

iShares predicts European investors will buy more US bond exchange-traded funds (ETFs), noting that flows into bond ETFs globally have passed a landmark in assets under management.

“We expect to see the demand for US-based corporate bond ETFs among European investors rise, given government bond yields in the US are not as suppressed as they are in Europe,” writes Stephen Cohen, head of fixed income beta at BlackRock, in a note.

Bond ETF AUM has passed $600 billion (€542 billion), with $22.9 billion flowing into the sector in the second quarter, 2016. Flows for the entire first half into bond ETFs stood at $66.7 billion – outstripping the period in the year before by about $24 billion.

Cohen said factors such as the shock Brexit vote and inflationary fears have seen investors using bond ETFs to “access markets on demand in the face of uncertainty”.

He added: “As bond ETFs are increasingly used as a financial instrument within portfolios to transfer risk quickly, investors are asking for more granular exposures. I expect we’ll start to see even more innovation in the industry.”

Morningstar notes that fixed income, with €6.75 billion of net new money, and commodities – mostly gold – with €3.3 billion of net inflows, were the two asset classes garnering the bulk of European investors’ interest over the second quarter.

ETFGI, which publishes data on ETF and exchange-traded product (ETP) flows, said fixed income ETFs and ETPs sold in Europe gathered the largest flows year-to-date, with a record net level of – in US dollar terms – $17.62  billion, followed by commodities, which also garnered record flows.

Overall, European ETF and ETP products have seen a fall in flows so far this year: as at June 30 they had gathered $22.34 billion, “significantly below” the $40.15 billion gathered at this point last year, said ETFGI.

In June in Europe, ETFs and ETPs gathered $5 billion in net new assets – though it was equity products that gathered the largest net inflows with $2.17 billion, followed by fixed income with $1.47 billion, and commodities with $1.24 billion.

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