Where do fixed income ETFs go from here?

Some key areas of fixed income ETFs in Europe need further development including environmental, social and governance (ESG) and smart beta products despite gaps in firms’ ranges gradually closing, according to Brett Pybus (pictured), head of iShares EMEA investment and product strategy at BlackRock.

BlackRock’s iShares manages approximately 90 fixed income ETFs in Europe but also offers currency hedged share classes for these products. Launching currency hedged versions has been a key product development theme for the company in recent years.

The purpose is to enable its clients to invest in the ETF using their preferred currency such as euro, sterling or Swiss franc which provides significant efficiency for investors.

As a result of the large volume of products available in the global market, assets in fixed income ETPs broke through the $1tn barrier in March.

For iShares, expanding share classes has been the priority over extending the number of funds specifically. It has only been a small number which are the result of client demand or the limited building block gaps which still remain.

Having said that, iShares has been plugging some of these gaps recently by launching a US dollar-floating rate, global aggregate bond funds as well as some ESG products.

Speaking to ETF Stream, Pybus said: “Most of the traditional beta market for fixed income is very well covered either by us or by the industry in general so I wouldn’t expect there to be a huge proliferation of products from here forward.

“There might be enhancements in structure such as share classes but one area I would keep my eye on is what happens in sustainable or ESG investing.”

ESG product development in the equity market continues to serge however the same cannot be said for fixed income as investors differ in perspectives as to which part of E, S or G to focus on. This is problematic for ETF issuers which want as many investors as possible to buy the products but will not because they focus on the environmental factor whereas the product could focus more on the social factor.

A final area for potential development in fixed income is factors or smart beta. There is significantly more academic research for the equity market which underpins the products in the market but this research is not there yet for fixed income.

As there is not the research available to lean on, it is not as well understood in comparison to equity ETFs which has fewer frictions when it comes to implementing strategies, Pybus explained.

Pressure on fees continues for the business. This week, ETF Stream revealed BlackRock had slashed fees on two gilt ETFs, the £1.6bn iShares Core UK Gilts UCITS ETF (IGLT) and the £903m iShares GBP Index-Linked Gilts UCITS ETF (INXG).

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