iShares recently announced that two of its fixed income funds, the iShares Core € Corp Bond UCITS ETF (IEAC) and the iShares J.P. Morgan EM Local Govt Bond UCITS ETF (IEML),
had both crossed the $10bn mark in assets under management.
iShares said the more favourable background for fixed income combined with structural moves within the market was driving greater bond ETF take-up. To illustrate this, it cited figures for inflows into bond ETFs for the first quarter of this year which hit a record both in Europe and globally with over $209bn going into EMEA-listed fixed income ETFs alone.
What the company says:
“Investors are demanding smarter, more resilient portfolios that are risk, time and cost efficient,” says Brett Olson, head of fixed income iShares EMEA at BlackRock. “As more investors look beyond bond selection to holistic portfolio construction, and to building defence for the next phase of the market cycle, we are seeing more indexing alongside other investment styles.
"These milestones are evidence of a shift in mind-set within in an industry undergoing fundamental change, with more and more investors using ETFs at the core of their portfolios.”
What the panel says:
Nicolas Rabener, FactorResearch
The recent inflows that pushed two European bond ETFs from iShares beyond $10bn in assets under management are a validation that bond ETFs have become mass-market products for European investors. However, it also reflects that bond markets lag equities as these have broken $10bn mark a long time ago. Furthermore, it also shows that Europe lags the US in ETF adoption as there are more than 20 fixed income ETFs in the US above $10bn AUM. Finally, US bond ETFs are also cheaper, which unfortunately is a frequent observation when comparing US and European ETFs.
Peter Sleep, 7IM
There are about 25 bond ETFs worldwide with more than $10bn in assets, so I think it is fair to say bond ETFs have broken through as a mainstream product in both institutional and retail markets. The global bond market is larger than the global equity market, so what is perhaps a bit surprising is that bond ETF assets are only about a third of assets in equity ETFs. There is still a huge opportunity in bond ETFs.
It should not be surprising that the first $10Bn bond ETF in Europe is from iShares, the iShares Core € Corp Bond UCITS ETF (IEAC). iShares has about 60% European market share in bond ETFs, according to data from JPMorgan, and they also have the next bond ETFs candidates in Europe to go through the $10Bn level – their emerging market debt ETFs and high-yield debt ETFs. What is perhaps remarkable is how ETFs have entered sectors that I certainly thought were marginal, such as these two cited, and made them commonplace.
For a long time, there was a feeling that bond ETFs could not work because of the opaque market structure in the bond markets. This may be true of the specialist, less liquid end of the market, as it is with equities, but the bond market structure is gradually improving and acceptance is becoming more widespread.
Oliver Smith, IG Portfolios
The largest fixed income ETFs should continue attract large inflows, as the combination of low fees (IEAC charges 0.2%) and super-liquidity (0.07% bid-ask spread) in many cases makes these more efficient to own than the underlying fixed income market. Bonds make up a vitally important allocation in the majority of risk-managed funds, but it is still rare to see individual investors actively buy fixed-income ETFs in their self-directed share dealing accounts.
We think this is partly because low rates make teaser offers in savings accounts a more attractive proposition, but also because the mechanics behind bond pricing are not understood beyond investment professionals. Fixed income sold as an ‘absolute return’ bond fund may have more success with retail investors, but whether they truly understand the risks within is open to debate.
Jose Garcia-Zarate, Morningstar Europe
The success of the iShares Core EUR Corporate Bond ETF is predicated on two key factors. First and foremost, the macro fundamentals in the eurozone have driven euro-based investors to seek extra yield away from government bonds for many years now, which favours corporate debt. At the same time, an increasing number of investors are keen on maximising returns by squeezing funds’ costs as much as possible, which thus has favoured passive vehicles such as ETFs. Why this iShares ETF in particular? For starters, it has claimed the first-mover advantage.
iShares has a very strong dominance of the European fixed-income ETF market, as it was the first provider to develop a comprehensive ETF offering for bonds. This ETF was launched in March 2009, so it already has a long track record. There hasn’t been much fee competition in bond ETFs in Europe so far, and so investors have not had a price incentive to switch to EUR corporate bond ETFs that came later from other providers. Besides, iShares has built an excellent reputation for its management of bond ETFs and this also counts. But very importantly, this iShares ETF tracks an index from Barclays that provides very comprehensive coverage of the market. The index doesn’t apply overly restrictive eligibility criteria for bonds and issuers and so it goes beyond the large-cap segment and/or the most liquid segments of the market favoured by other indices tracked by ETFs and index funds.
In sum, this index provides a broader and more realistic representation of the underlying and so sets the ETF in good stead to capture more of the upside (and thus yield) by including smaller cap issuers. All in all, a happy confluence of factors; favourable fundamentals, reasonably low price, excellent bond ETF provider credentials, and above all, the right index choice. The bond ETF marketplace continues to gain in strength as more investors become familiarised with the techniques used by ETF managers to replicate bond index performance. Also, the key selling point here is cost. Over the long-term, high fees have a very detrimental effect on returns and this is a message that is increasingly resonating with investors, particularly when they notice that many active managers do not keep up with standard index returns over the long-term. Fixed income has become a key growth target area for ETF providers in Europe and so I would expect more innovation and growth in the coming years.