Which fixed maturity ETFs are investors choosing?

Europe has welcomed 13 target maturity ETF launches in eight months

Jamie Gordon

Bonds stopwatch

Target maturity ETFs have amassed more than $3.2bn assets since arriving in Europe last August, however, one exposure has been a key focus of both inflows and product launches to-date.

The segment’s two top asset gathering products have been euro-denominated corporate bond ETFs from BlackRock, the iShares iBonds Dec 2028 Term € Corp UCITS ETF (IB28) and iShares iBonds Dec 2026 Term € Corp UCITS ETF (IB26), claiming $919m and $658m assets under management (AUM), respectively.

This comes as investors look to capitalise on higher yields ahead of expectations the European Central Bank (ECB) will be the first major central bank to cut its key policy rate.

Following the central bank’s decision to keep interest rates unchanged at its meeting last Thursday, Mark Wall, chief European economist at Deutsche Bank, said there will likely be at least one rate cut in the near term.

“The ECB is growing steadily more optimistic that the conditions for policy easing are falling into place,” Wall said. “No one should be surprised by a rate cut in June.”

By using target maturity ETFs, investors gain exposure to a basket of bonds with a specific maturity, enabling them to lock in currently elevated yields while avoiding the reinvestment risk involved in conventional fixed income ETFs.

IB28 and IB26 currently boast weighted averaged maturities of 3.43% and 3.54%, respectively, which would be expected to fall should the ECB choose to enact rate cuts.

Interestingly, the two ETFs have effective durations of 3.95 years and 2.12 years, respectively, shorter than the broad $15.5bn iShares Core € Corp Bond UCITS ETF (IEAC) – with a 4.48-year effective duration – showing investors are still choosing to position their ladder in euro corporates near or below benchmark duration levels.

Despite the ECB’s relatively dovish tone, this caution moving along the curve appears rational following last week’s US core price inflation print of 3.5% - ahead of forecast and crucially decreasing the likelihood of a rate cut by the Federal Reserve in the near future.

Hussain Mehdi, director of investment strategy at HSBC Asset Management, commented: “The increasing likelihood of a prolonged Fed pause poses some problems for policymakers in Frankfurt – and elsewhere for that matter.

“A growing policy divergence could reignite currency volatility and cause FX-driven inflation pressures. In this scenario, the ECB may move more gradually than markets currently anticipate.”

With the consensus view being that markets overshot considerably by pricing in six Fed rate cuts at the end of 2023, the largest target maturity ETF capturing US dollar-denominated credit – the iShares iBonds Dec 2028 Term $ Corp UCITS ETF (ID28) – stands at less than half the scale of IB28, with AUM of $399m.

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