Daniel Izzo, CEO of market maker GHCO, has claimed inflows into fixed income ETFs are “inevitable” due to the wrapper’s superior structure.
Speaking to Andrea Murray, head of business development at Blackwater Search & Advisory, for the firm’s Be in the Know series, Izzo said there are clear signs of ETF adoption on both sides of the Atlantic as investors start to recognise the advantages of the structure.
Highlighting this, fixed income mutual funds in Europe have seen €122bn outflows so far this year, as at the end of July, according to data from Bloomberg Intelligence, while bond ETFs have seen €17bn inflows over the same period. The huge diversion in flows comes two years after fixed income ETFs went through their biggest stress test during the sell-off in March 2020.
When liquidity in the underlying market dried up, ETFs started trading at all-time high discounts to net asset value (NAV) but this simply highlighted how the wrapper can become a price discovery tool during periods of market stress.
During this period, the iShares $ Corp Bond UCITS ETF (LQDE) traded 1,000 times on12 March 2020 while its underlying securities changed hands just 37 times, according to data from BlackRock.
“The growth of fixed income ETFs is inevitable,” Izzo stressed. “ETFs are a better instrument and fund structure. It is a question of time and adoption. Assets will migrate into ETFs rather than sit in what are otherwise outdated, inefficient and unproductive fund structures.”
Despite the challenging market environment for certain parts of fixed income – largely thanks to high inflation and rising rates – investors are using ETFs to be more specific with their allocations. This has been particularly prevalent in the US Treasury market.
For example, the iShares $ Treasury Bond 3-7yr UCITS ETF has seen $3.4bn inflows so far this year, as at 22 September, according to data from ETFLogic, while investors have piled $3.7bn into the iShares $ Treasury Bond 7-10yr UCITS ETF.
“The current interest rate environment has created a challenge for all fixed income,” Izzo continued.
“The asset class has historically never performed badly for many market participants and we are going through an interest rate-driven headwind. Despite this, we still see inflows into fixed income ETFs.”
This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To access the full issue, click here.