BlackRock Bond ETFs Hit $1T Mark

BlackRocks’ iShares global fixed income ETF business has crested the $1 trillion mark, representing about 40% of the $2.5 trillion global bond ETF market, according to the company. 

And that is just the beginning of a longer-term trend toward ramped-up flows into bond ETFs, according to Steve Laipply, BlackRock’s global co-head of fixed income ETFs.

Citing the Federal Reserve’s aggressive interest rate hikes during the early days of the Covid pandemic at a time when bond yields were much lower, Laipply told etf.com that “the hiking cycle kicked open the door for investors to take another look at fixed income.”

“Pre Covid, you had to go down in credit quality and down in liquidity to get decent yields,” he added.

Those higher rates drove many investors toward the comfort of money markets and short-term bond ETFs, but Laipply sees the Fed’s migration toward the start of a rate-cutting cycle as the next potential growth spurt for bond ETFs.

“You would have to go back to 2004 to see the yields you saw at the beginning of this year,” he said. “Going forward, once the Fed starts easing and the attractive yields (at the short end of the curve) start dropping, there will be another impetus for longer term yields.”

Laipply said asset flows into bond ETFs are already moving ahead of Fed policy because institutional investors and financial advisors recognize that “Fed policy is difficult to try and time.”

“What ultimately happens is the longer-term yields move in anticipation of Fed policy,” he said. “If you’re waiting for the all-clear signal, you might miss out.”

AGG, TLT Lead iShares to $1T

So far this year, the iShares Core U.S. Aggregate Bond ETF (AGG) is leading the inflows with $15 billion, followed by the iShares 20+ Year Treasury Bond ETF (TLT) with $10.8 billion worth of inflows.

Beyond the immediate navigation of Fed policy, Laipply said fixed income ETFs are benefiting from a “sea change in the way investors view bond ETFs.”

He mentioned the spike in volatility during the early days of Covid at the start of 2020 as a “stress test for fixed income ETFs.”

As bond traders across the board scrambled for liquidity during that period, Laipply said, “investors really started gravitating toward bond ETFs, particularly institutional investors, and that has been intact since then.”

According to BlackRock, global bond ETF assets currently represent nearly 2% of the $140 trillion global bond market, and the forecast is for bond ETF assets to reach $6 trillion by 2030.

“Money is in motion because of the normalization of yields,” Laipply said. “And there are structural trends favoring fixed income ETFs, including model portfolios, fee-based advisors and institutional investors.”

Add to that the fact that active bond ETFs are now growing at four times the rate of passive strategies and Laipply sees bond ETFs as a “modernizing force in the bond market.”