Given stagnant equity returns and a reduced appetite for risk, demand for exchange-traded funds is shifting into a new area: fixed income.
The $1.5 trillion global market for ETFs is still dominated by equity products in North America, which account for about $1 trillion in assets under management. The lion’s share of the growth, however, is happening in fixed income, according to Noel Archard, global head of product development and management for iShares, the ETF family managed by Blackrock. “ETFs are pushing into different classes of fixed income. In a low-rate environment, ETFs are useful because they bring efficiency. We have more and more requests for fixed-income ETFs. It was a big trend last year, and we expect it will continue this year,” Archer said.
On a global basis, fixed-income exchange-traded products grew 24.4 percent in 2011 to $258 billion, according to BlackRock. That was by far the fastest growth in the industry, which grew 2.9 percent overall to $1.525 trillion. Developed-market equity grew 3.3 percent, thanks to an inflow of new money. But much of that growth was offset by the fact that few equity ETFs showed a performance gain in 2011, a year in which the equity markets were essentially flat.
Equity markets got off to a good start in 2012, but concerns about the sovereign risk crisis in Europe, the pace of growth in China and the economic outlook in the U.S. remain. So many investors are looking for stability and yield in higher quality sectors of fixed income.
Given the fact that yields are low, keeping costs down is a priority for investors. And that is part of what makes ETFs appealing, according to Archard. Their fees are often in the range of 20 to 70 basis points, which is cheaper than the fees typically charged by other sorts of funds, such as mutual funds.
Archard said BlackRock has a range of new exchange-traded products in development.
“We will be focusing on new products at the ends of the spectrum — shorter duration and higher yield. Despite news that the Federal Reserve expects rates to remain low until 2014, there is a feeling that at some point rates will go up, and there will be some yield-generation on the shorter end of the spectrum,” Archard said. “There is also demand for domestic versus international credit and for dollar-denominated assets across the board,” Archard said.
That doesn’t mean that demand for equity ETFs has dried up. “Despite the year’s serious macroeconomic challenges, ETPs offering equity exposure to the U.S. and Europe captured more new money in 2011 ($48.8 billion and $15 billion, respectively) than in 2010 ($40.1 billion and $8.7 billion),” BlackRock Investment Institute said in a January 16 report.
Demand for exchange-traded products varied widely around the world, falling 5.3 percent in troubled Europe but rising 8.3 percent in Asia. It was the world’s emerging markets — usually a source of fast growth — that were truly hammered though, contracting 18.7 percent. The emerging markets suffered a negative return of $43 billion and net redemptions of $1.8 billion, according to BlackRock. That was a far cry from 2010, when the emerging regions grew $40.5 billion.·
But overall demand for exchange-traded products strengthened toward the end of last year. Inflows into global ETPs rose $14.2 billion in December, compared with an outflow of $0.6 billion in November. While the data for January is still being crunched, a robust equity market and signs of economic strength in the U.S. may well help sustain that trend.
