Demand for Bond ETFs is Growing

In the six calendar years since the onset of the financial crisis in 2008, fixed income ETF trading volumes grew more than 4.5 times or at annual rate of 33%. Over the same period, U.S. fixed income ETF industry assets grew to $297 billion, from $57 billion. As of April 2015, the industry had $336 billion in assets. We believe the continued adoption of these products by institutional investors has been a major driver and according to the recently released Greenwich Associates 2015 US Fixed Income ETF Study, the trends also appear quite favorable going forward.

Overall, 59% of fixed income ETF investors in the study reported that they increased their usage since 2011, with growing numbers of institutional investors (notably investment managers, RIAs and insurance companies) turning to ETFs as a liquidity enhancement tool by employing bond ETFs alongside individual bond holdings or in place of derivatives. In addition, institutions are turning to ETFs to adjust portfolios to shorten duration, diversify portfolios and seek out sources of attractive return in high yield and emerging markets. Further, institutions report they have traded ETFs in large sizes, with half having done a single trade of $11 million or more.

We believe institutional demand for bond ETFs is positive for all investors as the enhanced liquidity keeps costs down. According to S&P Capital IQ, 20% of all fixed income ETFs trade with a bid/ask spread of $0.01 or $0.02, including iShares Core Aggregate Bond (AGG), PowerShares Emerging Markets Sovereign Debt (PCY) and Vanguard Short-Term Corporate Bond (VSCH). Furthermore, as assets climb in these products, ETF providers are better equipped to reduce expense ratios.

S&P Capital IQ began ranking fixed income ETFs two years ago based on a combination of performance analytics, risk considerations and cost factors. While some of the metrics are similar to our more established equity ETF rankings (technical analysis, standard deviation, expense ratio and bid/ask spread), we employ holdings-based analysis applicable to bonds (30-day SEC yield, credit ratings and duration). 

As of the end of April 2015, Overweight ranked fixed income ETFs rose 3.2% on an annualized basis since the May 17, 2013 inception, ahead of the 2.6% gain for the Barclays US Aggregate index. Meanwhile Underweight ranked ETFs declined 2.7%. ETF rankings are refreshed on a daily basis. See our performance.

According to the Greenwich study, when institutions seek out a fixed income provider, they look first at the quality and breadth of the firm's offerings and then at the liquidity of the provider's products. When asked to name a preferred provider, iShares/BlackRock garnered 57% of the 46 respondents' votes, while Vanguard and State Street/SPDR received 24% and 9%, respectively. An unnamed collection of other ETF providers received the 11% of remaining of the responses.

In regard to breadth, S&P Capital IQ has research on 71 taxable fixed income ETFs from iShares (17 with S&P Capital IQ Overweight rankings), compared to 29 from State Street (9) and 15 from Vanguard (5). We encourage investors to look at the S&P Capital IQ Overweight ranked ETFs from these providers and others, such as Guggenheim and PowerShares, which are available on our research platforms.

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