[ M A R K E T
new regulatory initiatives, such as MiFID II in Europe,
have acted as a catalyst for the increased adoption of
ETFs. Transparency on cost firmly places the spotlight
on value for money, while transaction reporting under
the new regime should offer more insight into the
pricing and volumes of ETFs. This is kick-starting
a renewed interest in ETFs as investors evaluate differ-
ent methods of trading which are perhaps more cost
effective, according to BlackRock’s Pybus.
“We are seeing growing investor confidence in bond
ETFs as they become a more central part of the fixed
income ecosystem,” he says. “We have seen more of
the traditional broker-dealers start trading bond ETFs,
the same entities who historically focused on trading
single bonds. At an industry level, there is a concerted
effort on the part of clients exchanges, issuers regula-
tors to learn more about how the bond ETFs work and
the role they play in the markets.”
Another key driver in the adoption of fixed income
ETFs came about early this year with the arrival of
insurance companies. The National Association of
Insurance Commissioners began publishing a list of
approved bond ETFs for insurance company investors
and introduced new accounting guidelines known as
“Systematic Valuation” which provide a more ‘bond-
like’ treatment of fixed income ETFs for accounting
purposes. These changes are expected to attract more
than $300 billion into debt ETFs, according to statis-
tics from BlackRock..
The arrival of insurance money marks a significant
moment for the fixed income ETF industry explains,
Sage Advisory’s co-founder, president and chief invest-
ment officer, Bob Smith: “The potential for insurance
money to come into the ETF market without the risk
of suffering a decline in terms of risk-based capital of
their holdings will be a significant force in driving the
market towards stability.”
Sage Advisory is an Austin, Texas-based asset man-
agement firm with $12.8 billion of assets under man-
agement. The firm launched its own environmen-
tal, social and governance (ESG) credit ETF in
October and has been actively engaged with
fixed income ETFs for some time already.
“We have certainly embraced fixed in-
come ETFs for insurance portfolios, corpo-
rate, and liability-driven investment (LDI)
pension fund accounts across the board in
a fairly creative fashion. It’s an attractive
technology to apply but you need to get under
the hood to understand how it works and trades
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F I X E D
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“We are seeing growing investor
confidence in bond ETFs as they
become a more central part of the
fixed income ecosystem.”
- BRETT PYBUS, HEAD OF ISHARES EMEA
FIXED INCOME STRATEGY, BLACKROCK
in terms of liquidity,” Smith adds.
The future of the fixed income
ETF industry, and the ETF indus-
try as a whole for that matter, looks
bright. With a variety of investors
now seemingly embracing the
product, armed with a greater un-
derstanding of how they function,
assets under management and
daily trading volumes seem set on a
growth course.
The increase of liquidity in the
ETF market presents an intriguing
opportunity for asset managers in
their pursuit of alpha. More prod-
ucts will likely come to market and
as participant’s knowledge increas-
es, so too will confidence levels.
As investors continue to become
educated on ETFs and regulation
brings about new data on the per-
formance of funds, the bond ETF
industry is certainly one to keep an
eye on in the near future.
Issue 55 // TheTradeNews.com // 67