- Robert S. Kapito, BlackRock President, says global bond ETF assets will double by 2024, attributing his reasoning to product innovation, technology, and market structure.
- It previously took bond ETFs nearly 20 years to growth beyond $1 trillion.
- The firm relays the four long-term trends that will be responsible for the much quicker trek above the $2 trillion threshold.
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It’s not everyday that BlackRock, the world’s largest investment firm, says a set of assets are going to double in five years. But today seems to be that day.
Exchange-traded-funds — an asset class that BlackRock helped pioneer — have exploded in popularity. The voracious appetite for lower costs, transparency, and efficiency within investor holdings has propelled the industry to over $4.7 trillion worldwide.
But not all asset classes have been along for the ride — and BlackRock sees a huge opportunity in this lapse.
"It took nearly two decades for bond ETFs to surpass $1 trillion in global assets. BlackRock believes the next leg of growth will be swifter and broader, with bond ETFs surpassing $2 trillion by the end of 2024," Stephen Cohen, head of EMEA iShares at BlackRock, said in a recent client note.
As it stands right now, bond ETF assets represent less than 1% of the $105 trillion global fixed income marketplace, implying ample room for growth.
"The next leg of growth will be driven by investors finding novel uses for these versatile tools," BlackRock President Robert Kapito told clients this month. "Individual savers will increasingly use bond ETFs to help generate income; asset managers, including BlackRock, will add them to strategies designed to beat their benchmarks; and asset owners such as pension funds will continue to rely on the greater liquidity and lower costs to execute complex portfolio strategies."
BlackRock attributes their forecast to four long-term trends:
"Institutional and wealth managers are increasingly taking a ‘whole portfolio’ approach that focuses first on desired outcomes, second on asset allocations, and finally on the most efficient way to implement them," Cohen said.
Access to different sources of return and risk management is an integral part of any portfolio. Gone are the days of a bifurcated approach that simply shifts weights between stocks and bonds within a portfolio. The goal posts have changed.
Growing adoption by institutional investors
Since the financial crisis, institutional investors have increasingly relied on bond ETFs for market access. The volume and liquidity provided a welcoming lifeline for money managers amidst the wreckage.
"Efficient bond ETFs traded continuously on exchange throughout and after the crisis, providing large investors with a much-needed alternative," Cohen said. "Institutional adoption drove higher trading volumes."
These institutions can now manage cash reserves, transition between non-liquid strategies, and manage inventories and credit risk with ease due to this adoption.
The graph below depicts the ravenous growth of trading volume in bond ETFs.
Modernization of the bond market
Electronic bond trading has immensely improved liquidity within the debt trading universe. Now, a totality of bonds are priced and traded daily, helping boost the growth of digital transactions and bond ETFs in the process.
"The bond ETF ecosystem has evolved to enable rapid pricing and execution of individual bonds and, importantly, bond portfolios," Cohen wrote.
The chart below shows just how fast electronic trading is changing the landscape.
Constant ETF innovation
The demand for ETFs that cater towards niches and specificities continues to explode as investors clamor for allocations that match their personal values. In addition, newly-minted bond ETFs allow investors to hedge currency and interest rate risks with ease.
"Innovations in factor-based bond ETFs, now in the early stages, will provide investors with new ways to calibrate portfolios, for instance by helping investors seek to balance credit and duration risk, or select bonds according to financial traits such as quality and value," Cohn concluded.
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