BlackRock Inc. believes global fixed income ETFs will make up nearly half of the more than $10 trillion that the wrapper currently manages by 2030 despite difficult macroeconomic conditions for bonds around the world.
The liquidity and low cost of broad bond funds will largely replace holding bonds themselves in investor portfolios due to their liquidity advantages, the world’s largest money manager said in a paper released Wednesday.
BlackRock also expects bond ETFs to take over the fixed income portion of the popular “60/40” retirement portfolio with a barbell strategy of passive index-based funds and active funds seeking noncorrelated returns.
The report also sees bond ETFs becoming more granular in their exposure, targeting thinner slices of the fixed income market by duration, credit quality, “green bond” credentials and more.
“Such strategies will begin to blur the lines between what was generally considered index and active, since they will be steered both by rules-based methodologies and the discretion of individual managers,” the report reads.
Fixed income ETFs globally comprise approximately $1.5 trillion, according to BlackRock’s estimates. The firm expects that figure to nearly double to $2.8 trillion by 2025 and hit $5 trillion in 2030.
Most bond ETF assets are held in U.S.-listed funds, which hold $1.0 trillion under management and have gained $36.9 billion in year-to-date net inflows, according to ETF.com data provider FactSet.
Fixed Income’s Rough Patch
BlackRock’s call comes after months of decades-high inflation readings in major economies around the world and a Federal Reserve primed to use half-percentage point hikes or higher to fight rising prices.
Central banks propped up debt markets during the COVID-19 pandemic to keep credit moving throughout the world economy, and slashed rates close to zero to spur economic growth after the “flash crash” of March 2020.
Those factors have led to some of the most difficult years for the bond market in recent memory, with real yields either below or near 0% and asset prices distorted by government involvement.
The iShares Core U.S. Aggregate Bond ETF (AGG) is down 9.6% year –to date after posting a 1.64% loss in 2021. The Vanguard Total International Bond ETF (BNDX) is down 7.86% year –to date and lost 2.3% last year.
BlackRock’s report also notes financial institutions are using bond ETFs for risk and liquidity management purposes, citing internal research showing the 10 largest asset management companies in the world and 10 central banks use fixed income ETFs.
It also pointed to third-party surveys estimating 95% of public pension funds in the U.S. and eight of the 10 largest insurers in the country adopted the ETFs for volatility management in March 2020 or in this year’s market turbulence.
“We believe that evolved portfolios will increasingly feature bond ETFs as essential elements for calibrating risks and opportunities while simultaneously increasing liquidity and lowering costs,” the report said.