Fixed income ETFs are expected to take a bigger share of overall ETF inflows and an abundance of new products is anticipated, according to research from new European ETF issuer Tabula Investment Management.
MJ Lytle, Chief Executive, Tabula Investment Management
Presently, around 23% of assets invested in ETFs track fixed income exposure; however, fixed income ETFs accounted for 26% of overall flows into ETFs last year.
A recent survey of institutional investors and wealth managers, commissioned by Tabula, found that 43% of those interviewed expect flows to be 30% or more by 2020, and only 22% think it will be below last year’s levels.
The firm commissioned PollRight to conduct the research with professional investors including asset managers, pension funds, insurance companies, private banks and wealth managers. A total of 55 investors took part in the survey in April 2018.
The research also revealed that just over half (53%) of those interviewed expect the amount invested globally in fixed income ETFs to reach $1.6 trillion by the end of 2020 – a rise of 167% on its total value as of the end of 2016.
In terms of the drivers of growth, two-thirds (67%) of institutional investors and wealth managers say low cost is the main reason for the growth, followed by 52% who say it the ease of access to markets. One in four (24%) noted the transparency and intra-day access that ETFs offer as a key attribute in their future growth.
The research suggests such growth potential will lead to a huge increase in the number of fixed income ETFs launched in Europe over the next three years.
There are currently around 400 fixed income ETFs listed in Europe; however, the survey reveals 64% of those interviewed anticipate there will be 500 or more by 2020. Some 26% believe there will be more than 750 fixed income ETFs by this date.
Tabula highlights that this could result in large number of me-too fixed income ETFs launched, all offering much the same investment propositions. It is calling for a greater focus on innovation in order to address the needs of fixed income investors.
Michael John (‘MJ’) Lytle, chief executive, Tabula Investment Management, commented, “There is a strong belief among professional investors that demand for fixed income ETFs will increase dramatically over the next few years. This is likely to lead to a significant expansion in the number of products that are launched.
“I am concerned that a lack of innovation will mean that many of these products will offer very similar exposure to those that already exist. The palpable opportunity in this market lies in developing new products that deliver precise exposure and address the specific needs of fixed income investors.”
Tabula has indicated it aims to begin tackling these issues when it launches its first products. According to the new provider, the firm’s first ETFs will provide exposure to credit default swap (CDS) indices from IHS Markit.
The firm plans to build out its offering across the fixed class, moving from investment grade and high yield credit into inflation, government debt, emerging markets, bank capital, money markets, ESG strategies and Solvency II-efficient funds.