The Appealing Liquidity Of Bond ETFs

December 07, 2016

Through November, investors put $86 billion of new money into fixed-income ETFs in 2016, even as many industry observers, including CFRA, expect the Federal Reserve to resume raising interest rates in December.

One reason is that large institutional investors are increasingly using ETFs instead of individual bonds, and a recent survey gives us comfort that further adoption will persist. As this occurs, investors large and small benefit from the enhanced liquidity.

Greenwich Associates recently completed a survey of 104 U.S. institutional investors, including insurance companies, pension funds, endowments and registered investment advisors, about their use and perceptions of fixed-income ETFs. The average size of the firms surveyed was $60 billion in assets under management.

Why Institutional ETF Usage Is Growing

According to Greenwich, post-financial-crisis rules have increased capital costs for banks, causing many fixed-income dealers to respond by slashing inventories and pulling back from their traditional role as providers of secondary market liquidity.

Indeed, 97% of institutions in the study said increased difficulties in bond liquidity have forced them to consider other vehicles, such as ETFs or derivatives, instead of individual bonds to gain exposure. Overall, 30% said they would consider replacing individual bond positions with bond ETFs in the next year.

Based on a separate recently published global institutional investor study, Scott Couto, president of Fidelity Institutional Asset Management, said that "institutions are increasingly managing their portfolios in a more dynamic manner, which means they are making more investment decisions today than they have in the past."

Adjusting Credit Quality With ETFs

In the Greenwich study, approximately 40% of institutions plan to adjust their credit quality in the next year, and nearly 60% would consider using an ETF for implementation.

For example, investors might use the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) to gain access to greater credit risk through an ETF focused on bonds rated BB and B, and the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) to gain access to less credit risk through an ETF focused on bonds rated A and BBB.

LQD has been one of the more popular fixed-income ETFs, regardless of style, in the first 11 months of 2016.


Ticker Fund Issuer YTD 2016
Net Flows
SPY SPDR S&P 500 ETF Trust SSGA 11,556.00
AGG iShares Core U.S. Aggregate Bond ETF BlackRock 10,856.14
IVV iShares Core S&P 500 ETF BlackRock 10,516.54
VOO Vanguard S&P 500 Index Fund Vanguard 10,338.40
GLD SPDR Gold Trust SSGA 9,614.23
VEA Vanguard FTSE Developed Markets ETF Vanguard 8,942.43
TIP iShares TIPS Bond ETF BlackRock 6,743.37
IEMG iShares Core MSCI Emerging Markets ETF BlackRock 6,498.14
VWO Vanguard FTSE Emerging Markets ETF Vanguard 6,320.37
LQD iShares iBoxx $ Investment Grade Corporate Bond ETF BlackRock 5,076.67

Source: FactSet Research Systems


Find your next ETF

Reset All