The first quarter of 2019 saw the largest quarterly flow into bond ETFs on record – both in Europe and globally.
Brett Olson, Head of Fixed Income iShares EMEA at BlackRock
Investors poured $20.9bn into EMEA-listed fixed income ETFs, accounting for approximately 60% of total flows into EMEA-listed ETFs across all asset classes. Globally, a record $62bn was added in Q1.
On the back of these flows, two iShares funds – iShares Core € Corp Bond UCITS ETF (IEAC) and iShares J.P. Morgan EM Local Govt Bond UCITS ETF (IEML) – surpassed $10 billion in assets under management, becoming the first bond ETFs in Europe to do so.
According to iShares, a more favourable background for fixed income, in part created by dovish central banks, is combining with the longer-term structural evolution in fixed income markets to drive greater usage of bond ETFs as tools for building portfolios.
Analysis of industry ETF flows indicates that while investors have been increasingly allocating to fixed income assets this year, they have been adopting a barbell approach – combining quality exposures with higher risk allocations offering attractive income, such as emerging markets debt.
The two iShares ETFs, both of which broke through the $10bn milestone in April, align nicely with these themes.
IEAC tracks the Bloomberg Barclays Euro Corporate Bond Index, providing exposure to broad-based EUR investment grade corporate bonds, while IEML tracks the J.P. Morgan GBI-EM Global Diversified 10% Cap 1% Floor Index, providing access to local currency government bonds from emerging market countries.
Launched in March 2009, IEAC has become the most actively traded bond ETF in Europe, trading approximately $170m per day so far this year, with over 90% of trading occurring on OTC platforms. The fund currently offers a weighted average coupon of 1.9% and comes with a total expense ratio (TER) of 0.20%. It is listed across Borsa Italiana, Xetra, Euronext Amsterdam, London Stock Exchange, and SIX Swiss Exchange.
With 10-year bund yields still close to zero, it appears that investors are continuing to search for positive-yielding assets, especially after ECB’s policy reversal in March 2019.
IEML meanwhile includes both investment grade and high yield issues. The success of this fund suggests that investors appreciate the diversification benefits of passive, index-based products in markets that exhibit high levels of idiosyncratic risk. The fund currently offers a weighted average coupon of 6.21% and comes with a TER of 0.50%. It is listed across Borsa Italiana, Xetra, London Stock Exchange, and SIX Swiss Exchange.
Commenting on the milestones, Brett Olson, Head of Fixed Income iShares EMEA at BlackRock said: “Investors are demanding smarter, more resilient portfolios that are risk, time, and cost-efficient. As more investors look beyond bond selection to holistic portfolio construction, and to building defence for the next phase of the market cycle, we are seeing more indexing alongside other investment styles.
“These milestones are evidence of a shift in mindset within an industry undergoing fundamental change, with more and more investors using ETFs at the core of their portfolios.”
Globally, bond ETF assets currently stand at $982bn (as at 1 May 2019) and have the symbolic $1 trillion milestone firmly in their sights.