This year’s robust performance for the global stock market has stoked so much attention that it has distracted focus from other strong performing assets. Look no further than bonds, where fixed-income exchange-traded funds recently surpassed the $1 trillion mark in assets.
Bond ETFs scooped up a record $25 billion in June, more than 45 percent greater than the prior record in October 2014, according to State Street Global Advisors. Let’s examine three key trends that are driving assets into bond ETFs.
Diversify Credit Risk
It may be hard to remember, but bond ETFs didn’t exist just 20 years ago. Before that, the choices for spreading credit risk were limited to U.S.-focused bond mutual funds and the old-school strategy of buying lots of individual bonds from different issuers.
Bond ETFs have single-handedly helped investors and advisors to diversify fixed-income credit risk in both U.S. corporate and municipal bond markets. Furthermore, international markets have been blown wide open with products such as the SPDR Bloomberg Barclays Emerging Markets Local Bond ETF (EBND) that provide exposure to bond markets in emerging economies without the single-issuer credit risk. That has been a huge development for bond investors.
Customize Durations
One of the gripes against bond ETFs is that maturing bond issues are constantly being replaced with new bond issues. As a result, fixed-income investors never truly enjoy the fruit of full maturity from their bond portfolio as they would by holding a portfolio of individual bonds.
ETF providers have addressed these complaints by offering target-date bond portfolios. Here’s what it means: Investors can avoid the trouble of bond laddering by simply buying the target bond ETF with the desired maturity of their choice.
BlackRock, for example, offers iShares funds covering corporate and municipal bonds with target dates from 2019 to 2028. As long as investors hold their fund, they are paid interest just like with a regular bond fund. At the end of the term, the bond ETF liquidates and bond investors receive their principal back.
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