Abstract
Since the financial crisis, demand for fixed income ETFs has increased dramatically. An analysis of this market shows that most of the growth has occurred in ETFs covering U.S. Corporate Bonds, Global Bonds and Emerging Market Bonds. This rapid growth suggests that institutional investors have begun to use fixed income ETFs to achieve both strategic and tactical asset allocation goals. Changes in fixed income ETF volume are positively related to changes in the VIX, which suggests that investors are using fixed income ETFs to tactically shift into fixed income when the stock market becomes more volatile.
Highlights
Demand for bond ETFs has grown dramatically since the beginning of the financial crisis
According to a study by Greenwich Associates, bond issuance is near record highs, but liquidity for individual bonds has declined despite portfolio managers maintaining steady asset allocations in bonds
As transaction costs continue to fall due to competition and liquidity continues to rise due to increased demand, fixed income ETFs will likely grow in popularity for institutional investors
Summary
Demand for bond ETFs has grown dramatically since the beginning of the financial crisis This has continued despite growing concerns over rising interest rates. There is considerable interest in foreign fixed income as well This should not be surprising since it is not unreasonable to expect institutional investors to begin chasing more attractive yields in other markets given the relatively low yields available in the U.S market. As tactical tools, both global and emerging market ETFs provide diversified access to higher yield markets without requiring tremendous expertise in security selection. This suggests that uncertainty helps to drive interest in fixed income ETFs
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