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BlackRock : European Bond ETF market breaks into stride

Brett Olson iShares ETF ETFs

iShares ETFs become industry firsts to cross $10bn…

Brett Olson, Head of Fixed Income iShares EMEA at BlackRock


A meeting of prevailing forces

– A more favourable background for fixed income, in part created by dovish central banks, is combining with the longer-term structural evolution in fixed income markets to drive greater usage of bond ETFs as tools for building resilient portfolios.

– Q1 saw the largest quarterly flow into bond ETFs on record – both in Europe and globally. Investors poured $20.9bn to EMEA-listed fixed income ETFs in Q1, accounting for approximately 60% of total flows into EMEA-listed ETFs across all asset classes. Globally, a record $62bn was added in Q1.

– Analysis of industry ETF flows indicates that while investors have been increasingly allocating to fixed income assets this year, they have been adopting a barbell approach – combining quality exposures with higher risk allocations offering attractive income, such as emerging markets debt.

Industry milestones

– In April, the iShares Core € Corp Bond UCITS ETF (IEAC) that gives exposure to broad based EUR investment grade corporate bonds crossed €10bn, 10 years after launch in March 2009.

– With 10-year bund yields still close to zero, investors continue to look for positive-yielding assets, especially after ECB’s policy reversal in March 2019.

– IEAC’s strong and consistent performance track record over the past decade is testament to the validity of indexing in fixed income. Since inception, IEAC’s net performance has been in line or even slightly better than the index it tracks.

– IEAC is the also most actively traded bond ETF in Europe. The fund trades ~$170m per day this year, with over 90% of the trading happening on OTC platforms. This is a meaningful enhancement in post –trade transparency since MiFID II came to effect in January last year.

The same month, iShares J.P. Morgan EM Local Govt Bond UCITS ETF (IEML) also crossed $10bn in assets.

The growth of indexing in EMD demonstrates the benefits of diversification in an asset class that often faces increased idiosyncratic risks.

Bond ETFs are fast approaching $1tr is assets – currently at $982bn (as at 1 May 2019)

Why size matters

As the industry continues to grow, investors are taking comfort that bond ETFs are robust and deep enough to support both strategic and tactical trades, especially during periods of volatility.

Beyond assets, the iShares bond ETF range saw record quarter of trading volumes of $228bn.

MiFID II post trade transparency has provided additional clarity providing greater visibility on how often ETFs are changing hands.

Brett Olson, Head of Fixed Income iShares EMEA at BlackRock commented:

“Investors are demanding smarter, more resilient portfolios that are risk, time and cost efficient. As more investors look beyond bond selection to holistic portfolio construction, and to building defence for the next phase of the market cycle, we are seeing more indexing alongside other investment styles.

“These milestones are evidence of a shift in mind-set within in an industry undergoing fundamental change, with more and more investors using ETFs at the core of their portfolios.”

In August last year, the iShares Core S&P 500 UCITS ETF (CSPX) became the first European ETF to surpass $30bn in assets.

Source: ETFWorld