First there were four. Now there are 325. That’s the number of fixed-income ETFs that have come to market in the 15 years since the very first bond ETFs launched July 26, 2002.
In that time, fixed-income ETFs tapping domestic as well as international debt securities have grown to amass nearly $540 billion in combined assets. And many issuers, including iShares—the firm behind the original lineup of bond ETFs—say investors are just now beginning to truly embrace these strategies.
Fifteen years ago—and roughly a decade after equity ETFs were first introduced—investors were for the first time able to access on an exchange four bond ETFs:
- iShares 1-3 Year Treasury Bond Fund (SHY)
- iShares 7-10 Year Treasury Bond Fund (IEF)
- iShares 20+ Year Treasury Bond Fund (TLT)
- iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)
Why Bond ETFs Were Milestones
Two things stand out when we look back at this milestone. First, there’s the story of market access. Secondly, the story of cost.
One of the biggest challenges to putting fixed-income securities in an ETF wrapper was the fact that bonds typically trade in the secondary market over the counter, but ETFs are listed on exchanges. It took time for the “standardization to the ETF wrapper” to take place and allow investors to trade bonds on stock exchanges, BlackRock fixed-income strategist Karen Schenone says.
It also took time, she notes, for regulators to come on board with how bond ETFs would work, and even more so for investors to jump in.
That “standardization” is still a challenge if you consider that, unlike equity ETFs, it’s often very difficult for a bond ETF to own all the underlying securities in a given benchmark. That’s because a lot of segments of the bond market are highly illiquid, and sourcing every bond in the over-the-counter market would be cost prohibitive in many cases. We are talking about thousands of bonds in a single index.