BlackRock defends bond ETFs as it captures half of inflows

Stephen Cohen

BlackRock has fought back against criticism of bond ETFs as it captures almost half of inflows in the second quarter.

The asset manager’s passive business, iShares, saw $21bn inflows into bond ETFs in Q2 out of $43.3bn inflows in the products globally.

Global emerging market bond ETFs led demand with $7.5bn of net inflows in Q2, similar to Q1, although rising interest rates and increasing Treasury yields could dampen this trend in the coming quarters. Investment grade credit and government bond funds were also popular.

Multi managers from BMO Global Asset Management and Pictet are among those who argue that investing in bond ETFs is too risky as inflows go to the most indebted part of the market with zero analysis of the issue.

BMO GAM investment manager Paul Green says bond ETFs are an “accident waiting to happen”.

However, BlackRock head of fixed income beta Stephen Cohen says in times of market stress ETF shares are at least as liquid as the underlying bond market because they trade on exchanges connecting multiple buyers and sellers simultaneously.

“ETFs make it easier to trade bonds, including high yield and emerging market bonds, in all market conditions by allowing investors to buy and sell efficiently, and provide price transparency.”

Against criticism that ETFs skew valuations, Cohen says bond ETFs account for less than 1 per cent of the overall market and less than 3 per cent in high yield. “Investor sentiment, not ETFs, drives markets.”

However, Cohen expects ETFs and index funds to become more popular as Mifid II rules come into effect making as wealth managers and advisers increasingly seek lower cost and scalable portfolio building blocks.

Cohen notes recent trends within ETFs include securities lending to earn investors incremental revenue. Some investors are able to shave off the entire cost of fees through lending ETF units, research from Markit shows.

Derivatives are also becoming increasingly common with ETF investors using interest rate futures to hedge the rate risk in a broad corporate bond ETF or options as hedges for potential volatility.

Tilney Group managing director Jason Hollands this month warned fixed income currently has a “deeply unappealing” risk-reward profile due to distortions from record low interest rates and repeated QE programmes.

Fixed income sales dominated Investment Association sales figures for June attracting £1bn.

BlackRock bond ETF inflows (USD billions)

  Global industry US BlackRock EMEA BlackRock
Q2 2017 43.3 17.4 3.3
Q2 2016 25.8 4.9 6.7
FY 2016 115.6 38.1 21.0
AuM 649.6 227.0 99.0
Source: Global ETF industry data from BlackRock Business Intelligence, as at 30 June 2017