Fixed income ETFs: supply vs demand

Digital SmallDemand for fixed income exchange-traded funds (ETFs) has more than doubled since last year – yet still only occupies a fraction of the market share for the category.

Although assets of Ucits ETFs are largely concentrated in large-cap stocks, this year’s annualised net share issuance of fixed income and allocation funds in Europe stood at €36 billion through August 2019, compared to equities at €12 billion, according to Morningstar.

There are arguably not enough solutions to meet this demand, says Legal & General Investment Management’s (LGIM) head of ETFs, Howie Li. Until more options are available, he says, a bias towards equities can be expected.

“Fixed income ETFs are a huge growth opportunity. It’s where the development of the ETF industry needs to be focused over the immediate term,” he tells Funds Europe. “As an asset class, fixed income is much bigger and more complex than the equities market.

“If you look at some of the stats, you have year-to-date more than 80% of net new assets into fixed income. That goes to show as a trend, people are seeking out fixed income ETFs.”

Look at Morningstar’s best and worst-performing global ETFs and the trend becomes clearer. Six out of the ten bestselling funds were fixed income-focused, while nine of the ten worst-performing were equities as of the end of August this year.

For Deborah Fuhr, founder of research firm ETFGI, it’s all relative. Fixed income products came relatively late to the ETF market – for the first nine years, all products were equity-focused.

In many cases, the tools at hand to analyse fixed income products are more geared towards equities analysis, according to Fuhr.

“You have fewer index providers when it comes to fixed income benchmarks. Bloomberg is one of the dominant fixed income index providers, having bought what used to be Lehman then Barclays indices. Having fewer index providers and indices is one of the reasons you don’t have the same breadth and depth of products that you see in equities,” she says.

*Funds Europe spoke with other industry experts about fixed income ETFs. Read the article here.

©2019 funds europe

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