Are we experiencing the fixed-income ETF renaissance? Tidal Financial Group certainly sees it that way.
In a recent blog post, the firm explained that while bond investing was—for a decade—defined by near-zero interest rates, quantitative easing and a market environment where yield was scarce, there’s now room for active managers to “get creative again.”
“Now, with interest rates at their highest levels in over a decade, inflation reshaping market behavior, and equity volatility shaking traditional asset allocation models, asset managers are rediscovering bonds, and the ETF wrapper is proving to be a powerful tool for delivering them,” according to Tidal. “The fixed income renaissance is real, and it’s just beginning.”
ETF professionals see significant headroom for bond exchange-traded funds because the funds’ aggregate asset size is still small relative to the size of the underlying asset class, Aniket Ullal, head of ETF research and analytics at CFRA, explained to etf.com.
The ratio of U.S.-focused bond ETF assets to the U.S. fixed-income market is about 4%. In contrast, the ratio of U.S.-focused equity ETF assets to total U.S. equity market capitalization is about 12%, Ullal said.
“This indicates that bond ETFs have a lot of opportunity for growth, especially if investors become defensive in this volatile macro environment,” he added.
Of the 45 bond ETFs launched this year, 34 are active, according to Tidal.
“Fixed income funds are often used to provide individual investors with professionally managed solutions that could otherwise be out of reach,” Sam Millette, director of fixed income at Commonwealth Financial Network, told etf.com “Recently, asset managers have been introducing a wider variety of fixed-income ETFs to the market, which has led to rising investor appetite for fixed-income ETFs. This is especially true for ETFs that offer actively managed strategies.”
Kent Demien, director of investment research at Johnson Financial Group, explained that his firm has invested in passive fixed-income ETFs in client portfolios for many years and started incorporating actively managed fixed-income ETFs about two years ago.
“We appreciate the flexibility of the ETF wrapper, the simplicity of trading ETFs and will continue to use ETFs in client accounts wherever it makes sense to do so.”
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