Jordan Sriharan, head of MPS and passive at Canaccord Genuity Wealth Management, has said the price signalling feature with bond ETFs will drive uptake in the asset class.

Speaking on the fifth of ETF Stream’s webinar series, ETF Ecosystem Unwrapped, entitled Fixed income ETF innovation: New developments in a growing market, Sriharan (pictured) said the recent all-time wide discounts seen across bond ETFs highlighted the important price signalling tool ETFs provided.

This point around transparency is particularly prevalent in the bond space, he added, because it is effectively an opaque market and is therefore hard to view the true liquidity of assets.

When liquidity vanished in the underlying market during the coronavirus turmoil, ETFs continued to trade and reflected real-time prices.

Highlighting this, the iShares USD Corp Bond UCITS ETF (LQDE) traded more than 1,000 times on exchange and over-the-counter (OTC) on 12 March while its top five holdings traded an average of just 37 times each, according to BlackRock.

“Despite the alarmist headlines around ETF discounts to net asset values (NAVs), investors saw ETFs as a price signalling tool,” Sriharan explained.

According to a survey conducted by ETF Stream in April, 80% of respondents said the discounts had either increased their appetite for bond ETFs or had not changed their view.

“The discounts have led to a better understanding of how ETFs work and in turn will contribute to the growth of ETFs.”

However, he stressed there are plenty more opportunities for ETF issuers to innovate, in what is essentially still a relatively new market.

In a world of falling bond yields, Sriharan explained investors have become less comfortable with government bonds as a risk-off “shock absorber”.

Therefore, there is an increasing demand for specific exposures in the credit space that replace government bonds as the defensive bucket of a multi-asset portfolio.

In particular, Sriharan highlighted the potential to further develop ETFs with specific maturity buckets and credit ratings that enable investors to capture a specific part of the market.

Five fund buyers highlight areas for fixed income ETF innovation

Furthermore, he explained investors wanted to complement their active unconstrained strategic bond fund exposure with specific maturities.

This was due to the fact active managers have taken credit risk during the risk-off periods in the market but not much duration risk.

“Investors want to be able to complement active unconstrained bond funds with a specific maturity bucket through an ETF because they are underweight duration due to the structural position active managers have taken.”

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