Fund selectors demand more granularity in fixed income ETFs

ETFs play a crucial role in enabling investors to pinpoint specific parts of the yield curve

Tom Eckett

High Res 2023.11.07 ETF Buyer London 142

Duration positioning has driven the biggest divergence in views this year as fund selectors grapple with a combination of recession fears and the risk of a second spike in inflation.

With interest rates at over 5%, fixed income is once again interesting as markets enter a new regime of structurally higher inflation and potentially lower returns.

ETFs play a crucial role in enabling investors to pinpoint specific parts of the yield curve which they believe offer the best value.

In particular, a number of ETF issuers offer exposure to specific duration along the US Treasury yield curve including ultrashort, 0-1 years, 1-3 years, 3-5 years, 7-10 years, 10+ years and 20+ years.

In the US, the ETF market has developed even further with issuers launching single-year strategies for investors to target.

There are similar ETFs for the UK and eurozone, however, they lack the granularity of US Treasury ETFs due to the depth of the respective bond markets and a perceived lack of investor demand.

However, Sir John Royden, head of research at JM Finn, told ETF Stream at ETF Buyer: London 2023 that more granularity is needed in UK gilt ETFs.

Short-duration UK gilt ETFs currently offer exposure to 0-5 years, a duration that is potentially too broad for fund selectors looking to pinpoint specific parts of the yield curve.

“We have been buying short-dated UK gilts combined with the long end of the curve which achieves a yield far higher than where the belly of the curve is currently priced,” Royden explained.

“We have a desire for more precise duration and would love to see more granularity from ETF issuers.”

His views were echoed by Francis Chua, fund manager at Legal & General Investment Management, who said recent volatility has created many opportunities in the government bond market.

“The breadth of ETFs has really helped asset allocators,” Chua told ETF Stream. “We would like to see more granularity around regions and duration. With yields at 6%, ETF issuers should be able to launch a strategy that is attractive.”

In a world where investment horizons are shortening, ETFs will become even more important in allowing fund selectors to stay nimble.

At ETF Buyer: London 2023, Nathan Sweeney, CIO of multi-asset at Marlborough, said higher interest rates will lead to more volatility, shorter business cycles and markets moving at a quicker pace.

“From an asset allocator’s perspective, ETFs provide real tools that we can use to manage portfolios actively,” he said. “Over the last 10 years, it has been easy for investors with momentum in markets, however, that dynamic is clearly changing.

“I am thankful we have these tools that allow us to manage portfolios more effectively.”


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