Fixed income ETFs are latecomers to the ETF universe, but they’re growing, providing liquidity and price discovery in the bond market and investment assets for active fund managers.
“A ton of actively managed mutual funds own HYG or LQD,” said Eric Balchunas, ETF analyst at Bloomberg Intelligence, referring to the high yield and investment grade bond index ETFs from iShares. He hosted one of several panels at this week’s Inside ETFs conference dedicated to the fixed income market.
The use of such indexes is one of the best ways for active managers to “outperform in the long haul,” according to Derek Pines, analyst and portfolio manager at Bramshill Investments.
Fixed income ETFs first launched in 2002, almost a decade after the first equity ETF, the SPDR S&P 500 (SPY) did. They currently account for just under $450 billion worth of assets in the ETF universe compared with about $2.5 trillion in equity assets even though the global bond market – with $100 trillion in assets – is about 30% larger than the global stock market. But they appear to be the best hope of the ETF market for actively managed funds.
Currently most fixed income ETFs are passive funds that track bond market indexes such as the iShares iBoxx High Yield Corporate bond index (HYG) or iShares iBoxx Investment Grade Corporate Bond index (LQD), but there are also smart beta fixed income funds like the Barclays Yield Enhanced U.S. Aggregate Bond Fund (AGGY) that overweight higher yielding bonds, and a growing number of actively managed ETFs, such as PIMCO Total Return Active Exchange-Traded Fund (BOND).
In the U.S. most passive bond ETFs are linked to the Barclays U.S. Aggregate Bond Index (AGG), which is heavily weighted toward Treasuries and excludes high yield and Treasury inflation-protected securities (TIPS), said Natalie Zahradnik, executive vice president of PIMCO, leaving actively managed ETFs “lots of room to grow.”