BlackRock says bond ETFs to top $2T by 2024, driven by record capital inflows

July 15, 2020.

said exchange-traded funds in the global bond market could almost double in assets over the next four years as institutional investors flee market volatilities of the pandemic in search of liquid assets for their portfolios.

In a report released Wednesday, the world’s largest asset manager found that fixed income ETF assets ballooned by 30% during the 12-month period ended in June, totalling a record $1.3 trillion in trading in the first quarter of 2020.

The pandemic was a test of bond ETFs’ ability to withstand the pressures of continuous selling and potential price drops in their underlying markets, BlackRock said.

“The versatility and resilience of the largest and most heavily traded fixed income ETFs, especially through market stres this year, have made them more central to the construction of institutional investors’ portfolios,” said Salim Famji, global head of iShares and index investment at BlackRock.

Now, BlackRock, which manages about $6.8 trillion in assets, estimates that global fixed income ETF assets will reach $2 trillion in assets by 2024. ETFs currently make up just 1% of the $100 trillion global fixed income securities market.

About 84% of that growth will be propelled by institutional investors, many of them first-time buyers of bond ETFs, the asset manager said. The company saw an inflow of $105 billion into its iShares ETFs in the past 12 months, adding $57 billion in the second quarter of 2020 alone.

BlackRock counted over 60 first-time institutional buyers of iShares funds in the 12-month period, including pensions, insurers and portfolio managers who collectively added about $10 billion in assets. 

Much like equity ETFs, bond ETFs are generally managed and traded passively, and include a wide range of assets from U.S. Treasuries to corporate bonds. An institutional investor might use bond ETFs to boost the liquidity of their portfolio, reduce transaction costs and to hedge their risk, according to fund managers quoted in the report.

“We continue to utilize ETFs both for liquidity and to complement our active high yield managers,” said Joy Xu, vice president of strategic asset allocation and fixed income at Verizon Investment Management Corp. “In March this year, ETFs provided provided liquidity at a crucial time when the underlying market was difficult to trade.

U.S.-listed high yield bond ETFs averaged as much as $7.8 billion a day in March during the height of the country’s first coronavirus wave and comprised 29% of over-the-counter high yield bond trades, BlackRock said. That’s up from 11% of individual high yield trading in 2019.

Investment grade corporate bond ETFs made up as much as 24% of the OTC market for these assets in March, versus 10% in 2019.

Jeb Burns, chief investment officer at Municipal Employees’ Retirement System of Michigan, said his fund sold off its Treasury ETFs to add high yield and emerging market debt to the portfolio. The retirement fund had $12.4 billion in assets at the end of 2019.

“Even as volatility soared, we were readily able to raise cash by selling ETFs in order to meet our plan’s benefit payment needs,” he said. 

When the Dow Jones Industrial Average plunged more than 10% on March 12, BlackRock’s iShares iBoxx $ Investment Grade Corporate Bond ETF traded 90,000 times, the company said, versus just 37 times on average for the fund’s five largest bond holdings. 

The surge in trading volume amid a crisis suggests that fixed income ETFs provided “actionable prices for investors,” BlackRock argued, through real-time pricing and valuation of assets. 

“Fixed income ETFs helped credit markets operate better during times of market stress, including the unprecedented turmoil seen earlier this year,” said Carolyn Weinberg, global head of iShares products at BlackRock. 

“These ETFs contributed significantly to the financial ecosystem by providing additional liquidity and price discovery, relieving pressure from the underlying bond markets at a time when that was required.”

BlackRock introduced its first iShares ETF in July 2002. Since then, iShares has become a cornerstone of BlackRock’s business, with more than 900 ETFs and about $1.85 trillion in ETF assets under management.