Industry Updates

Why do investors use fixed income ETFs?

George Geddes

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Liquidity and price are the two reasons why investors use fixed income ETFs over other investment vehicles, according to Invesco's latest global fixed income survey.

The survey, entitled Invesco Global Fixed Income Study 2020, interviewed 159 investors from North America, EMEA and Asia Pacific, of which 59% incorporate fixed income ETFs within their portfolios.

Liquidity was the key driver for using ETFs among institutional investors with 61% citing this while price was highlighted by 71% of wealth managers.

Simplicity was also a factor for 58% of wealth managers while liquidity rounded-off the top three with 42%.

For institutional investors, price, convenience and tactical trading were also highlighted as reasons for using ETFs.

Other reasons for institutional and wholesale investors to use ETFs included transparency of holdings with 39% and 29%, respectively, as well as thematic investing with 23% and 21%.

Given a significant volume of investors use ETFs for their liquidity benefits, just over half (52%) of investors surveyed believe they have no impact on the liquidity of the underlying bonds.

However, some 34% believe ETFs make underlying bonds more liquid with the remaining 14% believing they make them less liquid.

The report highlighted the price discounts seen between fixed income ETFs and their underlying securities during the coronavirus turmoil.

However, the report said ETFs have acted as a key source of price discovery and played an important role in keeping markets moving.

Since the Global Financial Crisis in 2008, vehicles like ETFs and credit portfolio trading have enabled the fixed income market to evolve significantly in addition to the retrenchment of market makers, according to the report.

Environmental, social and governance (ESG) exposure is another factor for investors to use ETFs with 8% of institutional and 21% of wholesale investors selecting this option. However, the report said investors within the EMEA region incorporate more ESG products into their portfolios than those in North America and Asia Pacific.

Why incorporating ESG in fixed income can deliver a superior risk-return profile

Some 72% of EMEA-based investors invest in specific ESG products such as ETFs ahead of North America with 71% and Asia Pacific with 57%. Notably, 62% of Asia Pacific and North American investors integrate ESG factors into their financial and credit models.

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