There has been a shift in the way investors use fixed income ETFs in their portfolios following the huge increase in trading volumes during the extreme volatility in March.

Last year, fixed income ETFs in Europe saw €36.9bn inflows despite the coronavirus turmoil, the second-largest on record behind the €53.4bn positive net flows in 2019.

While critics of the ETF wrapper saw the well documented large discounts to NAVs as a sign of a liquidity mismatch, institutional investors took a different view.

According to BlackRock, more than 60 institutional investors became first-time buyers of fixed income ETFs during and after the record discounts in March.

Driving this increasing adoption underlined the fundamental shift in the way fixed income ETFs are being used, as highlighted in ETF Stream's Under The Spotlight with BlackRock last November.

Traditionally, the wrapper had been used as a vehicle for tactical allocation or rebalancing portfolios but in March, ETFs were adopted as a liquidity management tool as a replacement for derivatives and for strategic asset allocation purposes.

Fixed income ETFs being used as a liquidity management tool was highlighted by the secondary market trading volumes.

In March 2020, ETFs in Europe traded $443bn, 231% more than the average monthly volume in 2019. Taking a deep dive into an individual ETF, the iShares $ Corp Bond UCITS ETF (LQDE) traded 1,000 times on 12 March while its underlying securities changed hands just 37 times.

By trading far more than their underlying securities, ETFs provided investors with a clear picture of the actual price these bonds were trading at.

As a recently published Euroclear report said: “The message that the largest ETFs – especially fixed income ETFs – offered an oasis of liquidity in an otherwise barren desert has clearly got through to institutional investors.”

Sander van Nugteren, head of EMEA global markets at BlackRock, added: “We have barely scratched the surface of demand for fixed income ETFs. It started with multi-asset fund managers but it is now asset owners – pension funds, insurance companies and fixed income portfolio managers.”

As the benefits of fixed income ETFs become clearer, this adoption is only set to increase which will have a positive impact on the efficiency of the bond market overall.

In terms of future innovation, investors are starting to demand more specific exposures through ETFs such as different maturity buckets or different types of credit.

This is the next stage of development for an area of the ETF market that is most likely to see the sharpest increase in assets over the next decade.