ETFs are continuing to dominate the investment landscape, but many industry experts are anticipating that fixed-income ETFs in particular will continue to be the hottest product.
“If we had to paint one sustainable story, it has to be a greater uptick of fixed income in a world where interest rates are incrementally higher than they were before,” said Daniil Shapiro, director of product development at Cerulli Associates.
Last year, more than $225 million of inflows went into fixed-income ETFs, with the highest amount of money going into intermediate bond funds, followed by long government and ultra-short bond funds, according to Cerulli.
Meanwhile, New York-based BlackRock saw more than $100 billion of inflows into U.S. fixed-income ETFs in 2022 and $72 billion last year, according to Steve Laipply, global co-head of bond ETFs at BlackRock.
The firm has remained active in the space, launching the BlackRock Total Return ETF (BRTR) in December. The fund is a diversified core bond strategy that seeks alpha opportunities in the fixed-income market, Laipply said.
Lisle, Ill.-based Amplify ETFs has also launched its first fixed-income ETF, the Amplify Samsung SOFR ETF (SOF). It is one of the first funds to track the Secured Overnight Financing Rate (SOFR), which is a replacement for LIBOR. The goal of the ETF is to provide monthly income while reducing portfolio risk, said Amplify ETFs CEO Christian Magoon.
The fund launched in October and already has at least $150 million in assets. The firm plans to expand its presence in the market with products that can provide first-to-market options, he explained.
“We’d like to do more products, certainly in the fixed income space,” Magoon said. “It’s hard to outperform the industry when the industry is increasingly doing more fixed income and you only have one of your soon-to-be 30 products in the fixed-income space.”
The popularity of fixed-income ETFs has been sparked by several changes in the marketplace, according to Shapiro.
“Fixed-income ETF products have historically been somewhat hampered by low yields and in 2023 the yields are incrementally higher and financial advisors have their pick of fixed-income products on the back of greater product development,” he said. “So, all of a sudden, you are seeing greater flows through fixed-income products and that’s been a trend to watch in 2023 and we expect it to be a trend in 2024.”
Institutional investors have also started to embrace the funds more readily, according to Laipply, who said the top 10 largest global asset manager use fixed-income ETFs in their strategies.
The interest involvement of large institutions has paved the way for greater interest from advisors, who are becoming more comfortable with the ETF structure and are looking for different investment styles, according to Shapiro.
“The ETF structure is increasingly the go-to structure for financial advisors,” he said. “At this point in time, I would say financial advisors are exceptionally comfortable with the ETF product.”
The actively managed ETF model has also made it easier for fund managers to deliver fixed-income strategies to advisors in an ETF wrapper, according to Bryce Doty, senior portfolio manager and vice president at Minneapolis-based Sit Investment Associates.
“It makes a lot more sense to have a fund that’s actively managed on the bond side that can proactively avoid some of the pitfalls that a passive bond fund really can’t do anything about,” he said.
Actively managed ETFs have been on the rise recently, accounting for 19% of ETF inflows, which crossed $20 billion for the first time, Cerulli said.
Sit is interested in introducing two new fixed-income ETFs this year and will pursue that after it finds a new service platform, Doty said.
Looking ahead as more firms roll out their own fixed-income ETF products, Magoon said companies will look for ways to differentiate themselves in the market.
“I think that there will probably be more innovation done to squeeze out more income from fixed-income allocations or an overall portfolio to fund retirement goals,” he said.
Interest from advisors and current market conditions have combined to create a perfect environment for fixed-income ETFs to last for several years, industry observers say.
“We do believe fixed-income ETFs will continue to be a very significant driver of fixed-income flows going forward,” Laipply said. “We think they’re going to be even bigger as time goes by across all client types.”