BlackRock: Bond ETFs will reach $5 trillion in assets by 2030

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BlackRock’s headquarters in New York.

Jeenah Moon/Bloomberg

Exchange-traded funds investing in bonds are expected to nearly triple their assets under management over the next eight years, in part due to a shift triggered by the pandemic, according to

black rock

one of the largest asset managers in the world.

Bond ETFs have been around for almost two decades, but so far, with around $1.8 trillion in assets under management in 2021, they represent only a small part of the nearly $124 trillion global bond market. dollars. The total held in ETFs will reach $5 trillion by 2030, according to a BlackRock report released on Wednesday.

The majority of the global bond market, approximately 80%, is held in the form of individual securities. But the landscape is changing rapidly, with implications for both asset managers and investors looking for yield.

Due to the complexity and large number of individual debt securities, most bond market transactions are over-the-counter, a process that is often opaque and inefficient. ETFs, freely traded on exchanges, provided liquidity and transparency that did not exist in the underlying market, allowing thousands of bonds to change hands with a single click.

Adoption of bond ETFs has taken off since the Covid-19 pandemic, says Carolyn Weinberg, global head of products, ETFs and index investing at BlackRock. When bond trading seized up as lockdowns hit the economy and financial markets, ETFs offered huge liquidity.

Investors understood how important this was. “The ability to tactically and efficiently move in and out of fixed income exposure really reshaped the number of investors looking at bond ETFs,” Weinberg said.

Many pension funds, insurance companies and other institutional investors began substituting ETFs for individual bonds in 2020. The Federal Reserve bought bond ETFs for the first time in history so it could inject cash in the credit markets as quickly as possible.

When total bond ETF assets reached $1 trillion in 2019, BlackRock predicted that number would double by the end of 2024. The company updates this outlook, predicting that $2 trillion would be reached. 18 months earlier. In the first quarter of 2022, bond ETFs absorbed $40 billion in net new assets, even as the Federal Reserve’s efforts to fight inflation by raising interest rates drove down bond prices.

The growth of bond ETFs has also increased the underlying market’s overall liquidity and led to the electronicization of its trading system, Weinberg said. This, in turn, provided huge amounts of data that could help analytical algorithms create more accurate prices for fixed income securities.

The bond ETF industry is changing so rapidly that the lines are beginning to blur between what used to be considered index strategies and active strategies.

While the first generation of bond ETFs largely offered broad index exposure to the entire bond market or to a particular asset class, newer products have been able to carve out the securities market more precisely at fixed income in terms of credit quality, sectors, duration, sustainability and other risk factors. “This increasing granularity allows investors to redefine their desired market exposure,” the BlackRock report states.

Many newer bond ETFs are also making it easier for investors to access asset classes that were previously only available to large investors at high cost and with great difficulty, such as Asian high yield bonds. , secured loan obligations or senior loans. These products could help investors diversify their sources of potential return and achieve their investment objectives.

BlackRock believes this next generation of bond ETFs can reach $1 trillion in assets by 2030, up from around $200 billion today.

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