ETFs Increasingly Relied on for Portfolio Tweaks

Growth of market means more options for fixed income investors, says a recent survey.

Exchange-traded funds are increasingly helping investors adapt their fixed income portfolios to rapid changes in markets, a recent State Street Advisors survey found. 

The number of fixed income ETFs has nearly doubled to 500 between 2017 and 2021, permitting investors greater choices and flexibility in how they invest in fixed income, according to the survey. 

The survey noted that the “role of ETFs in asset allocation is expanding to non-core sectors,” such as high yield corporate debt. For example, almost one-third of institutional investors moved to high yield corporate debt and other alternatives, away from traditional fixed income over the last nine months, the survey found. Another 29% is expected to follow suit in the next year, according to the poll of 700 global institutional investors.  

ETFs are the primary vehicle for the movement, with 62% of investors who are increasing exposure to high yield corporate credit in the next year stating they are likely to do so via ETFs, while over half responded they would do the same for emerging market debt.   

“Our research confirms that with the dramatic rise in yields, investors are concerned about how to balance risk and return within their portfolios, leading them to look beyond traditional public fixed income investments,” Gaurav Mallik, chief investment strategist for State Street Global Advisors, said in a statement.  

Decades-high inflation and moves from across the globe from central banks have sent markets into a tizzy.  

U.S. bond prices have fluctuated dramatically, with the yield on the benchmark 10-year note up to 3.8%, more than two times the 1.5% it traded at just a year before. Investors are taking note and rethinking where and how they’re allocating assets, with ETFs being at the core of how they’re going to shape portfolio management in the future.  

Meanwhile, asset managers are under increasing pressure to ensure their fixed income portfolios take into account environmental, social and governance issues. ESG considerations were top-of-mind for asset managers, wealth managers and corporate pension funds to address through their fixed income allocations over the next 12 months, the survey shows, with 44% of North American respondents citing ESG integration as a top priority.  

For those looking to integrate ESG standards, index ETFs may be the way forward, according to Antoine Lesne, head of SPDR ETFs EMEA strategy and research at State Street Global Advisors.  

“The transparency element of index ETFs is a real advantage. Implementing ESG scores and/or climate targets is complex, and so having an index that guarantees, by its construct, that it will meet specific objectives of ESG score improvement, or year-on-year CO2 emission reductions, can be valuable to investors committing to such a trajectory,” he said in the survey.  

Contact Shubham Saharan at [email protected]