On the tactical side, investors can use bond ETFs in ways that go beyond long-only exposures.
“You can short ETFs such as JNK (SPDR Bloomberg Barclays High Yield Bond ETF), for example, which would shorten your beta exposure and decrease your credit sensitivity,” Bartolini explained.
“And there are options tied to fixed-income ETFs, enabling you to take levered positions,” he added. “Or you can use put options [on bond ETFs] to hedge your portfolio.”
Inflows
U.S.-listed bond ETFs have garnered about $13 billion in October as of Thursday, according to State Street. That essentially matches the $13 billion haul in September. And they’ve attracted $168.3 billion in assets year to date, topping last year’s record-high inflows of $155 billion.
And the inflows are going in and out of various bond categories, depending on market conditions. Bartolini noted the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) saw billions of dollars in inflows as investors derisked by rotating out of equities and into cash-like investments when the Covid pandemic kicked into gear in the U.S. That boosted BIL’s asset base to roughly $20 billion, but that’s now closer to $14 billion after the equity market subsequently rallied when investors rotated back to a risk-on trade.
And that risk-on move benefitted parts of the fixed-income market, too. Bartolini said State Street saw significant flows into some of its high-yield bond ETFs.
“We’re starting to see investors utilize fixed-income ETF exposures in a significantly macro way,” Bartolini said. “While the majority of fixed-income ETFs are indexed, there are active decisions made behind their use.”
Joshua Penzner, U.S. head of institutional fixed income at BlackRock’s iShares ETF division, said bond ETF usage has reached a turning point thanks to growing adoption of these products as portfolio management tools by large institutions, insurance companies, pension funds and asset managers.
To mirror Bartolini’s comments, he noted that institutional investors are using bond ETFs for both strategic and tactical allocations, and to increase the liquidity of their portfolios versus holding individual bonds.
“It continues to validate the power of bond ETFs as portfolio construction tools,” Penzner said. “And whether you’re an institution or individual investor, you’re building portfolios to get to a certain end goal.”
He added that the institutional embrace of bond ETFs increases the liquidity of these funds and lowers their trading costs.
“As more folks are buying and selling a product, you’re improving the ecosystem for everyone,” Penzner said.