The global bond ETF industry attracted $43.3 billion of net inflows in Q2 2017, just short of the industry record of $44.5bn set in Q1 2017, according to BlackRock’s Q2 Global ETF industry report.
BlackRock captured $21.0bn (or 48.5%) of global flows into bond ETFs during Q2 2017.
Stephen Cohen, head of fixed income beta at BlackRock, writes that the firm’s own ETF arm – iShares – captured $21.0bn (or 48.5%) of these net new assets with flows “driven by investor appetite for investment grade credit, emerging market debt and government bond funds.”
Emerging market debt ETFs saw $7.5bn of net inflows globally in Q2. Cohen notes: “Similar to Q1, while US investors preferred hard currency debt, European investors invested in both local and hard currency debt. This trend has tailed off at the start of Q3 as investors may be reducing allocations in reaction to recent central bank comments and increases in Treasury yields.”
BlackRock reports that global demand for ETFs tracking dollar-denominated debt has remained strong throughout 2017 while European investors began increasing their appetite for euro investment grade corporate bond ETFs from June. “The French election result appears to have reduced concerns around European political risks,” writes Cohen. “Even hawkish rhetoric from Draghi at the end of June failed to shake the positive picture for euro investment grade.”
Cohen also explains how the quarter saw investors increasingly building on the role of ETFs above and beyond broad market access tools. This includes lending out ETF units to earn incremental revenue, combining ETF positions with derivatives to achieve targeted exposures, and the increasing use of options on ETFs to hedge potential volatility.
Looking ahead into Q3 and beyond, Cohen expects regulatory measures in Europe, such as MiFID II, to catalyse the trend towards indexation and ETFs. He writes: “We believe the trend is set to take hold over coming months as wealth managers and advisers increasingly seek lower cost and scalable portfolio building blocks with ETFs well suited to this.”
Cohen also expects US dollar bond ETFs to remain popular outside the US with international investors continuing to drive demand for these assets despite the cost of currency hedging.