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Fund selectors are pushing asset managers to develop more bond ETFs to take advantage of attractive yields.
Bond UCITS ETFs saw a record $70 billion in inflows in 2023 as investors returned to the asset class after a decade of quantitative easing and negative yields, according to data from ETFbook.
Demand for bond ETFs is likely to continue, with 83% of professional investor respondents saying 2024 will be the year of bonds, compared to 40% for stocks. ETF stream and JPMorgan Asset Management.
This year, fund selectors are looking to increase the positioning is extremely important.
Bond ETFs play an important role in allowing investors to pinpoint the specific part of the yield curve that appears to offer the best value.
Sir John Royden, head of research at JM Finn, said: ETF stream He wants to make inflation-linked gold ETFs more segmented.
The UK’s largest inflation-linked bond ETF, the £705m iShares £ Index-Linked Gilts UCITS ETF (INXG), has a weighted average maturity of 16.97 years, even in an environment of rising inflation. It will underperform. is also increasing.
Legal & General Investment Management is proposing the L&G UK Gilt 0-5 Year UCITSETF (UKG5), which Royden says has a duration split with index-tracking ETFs at both the short and mid-points of the yield curve. He said it could get even deeper.
“We want more precise durations and we would like to see more granularity from ETF issuers,” he added.
Andrew Limberis, investment director at Omba Advisory and Investments, echoed his views, saying fixed income remains an area where investors want more control over duration across both government and corporate bonds and different currencies.
Corporate bond ETFs are expected to see strong demand in 2023, with the iShares Core Eurocorp Bond UCITS ETF (IEAC) receiving $5 billion in inflows, but the overall risk bucket has limited granularity.
fixed maturity bonds
After BlackRock introduced its iBond series to Europe last August, one area of innovation in 2023 was fixed maturity corporate bond ETFs.
Fixed-maturity ETFs allow investors to access corporate bonds of a specific maturity while benefiting from the diversification, transparency, and liquidity of an ETF.
Oliver Faizala, head of fixed income research at Charles Stanley, added that investors receive predictable cash flows over the lifecycle of a bond.
He called on ETF issuers to launch pound-hedged share classes for fixed-maturity, investment-grade bonds, which he predicted would be a big draw for investors who don’t have direct access to the bond market.
“These properties are becoming more apparent given the recent rapid rise in yields,” Faizallah continued. “However, the direct bond market is not for individuals and most of the bonds on issue are available with a minimum size of £100,000.
“While these products are becoming more accessible, the Pound Hedged Share Class for UK-based investors will be a great addition to our product portfolio in 2024.”
active demand
Demand for further product development in the active fixed income ETF space is also an area of focus for fund selectors.
Pacome Breton, Head of Portfolio Management at Nutmeg, said: ETF stream Asset classes such as high yield and emerging markets are ripe for innovation in the active fixed income ETF space.
“This year, actively managed fixed income ETFs will be more interesting than ever,” Brereton added.
“As central banks in major developed countries wind down quantitative tightening measures, the impact of currency fluctuations on emerging market debt has emerged as a key driver, and a wide range of products offering currency exposure flexibility are It will help us better manage the increased risk.”
Overall, European active ETFs saw inflows of $7.4 billion in 2023, up from $2.6 billion a year earlier. As more products become available and investors become accustomed to the benefits of ETF wrappers combined with active management.
Simon McConnell, head of portfolio construction at NetWealth, said the development of active strategies was “encouraging” for the ETF market. He called for more innovation in areas where the underlying markets are liquid, such as managed futures and trend-following strategies.
“It’s clear that active strategies within ETF wrappers are becoming more prevalent,” he said. ETF stream. “It will be interesting to see whether other active strategies, where the underlying assets traditionally held in mutual funds are liquid, become available in the form of ETFs.”
Thematic ETFs
Finally, it’s been a tough year for thematic UCITS ETFs, with outflows of $1.1 billion in 2023, up from $4.3 billion in 2022, as investors moved away from risky assets due to concerns about the impact of rising interest rates. It was seen.
Lymberis highlights the importance of more “well-defined” megatrends, which act as a middle ground between traditional sectors and “outlandish” themes, and further departures from a focus on market capitalization. did.
Meanwhile, Breton called for more cost-effective thematic ETFs in areas such as energy transition, artificial intelligence and robotics.
“Thematic products remain attractive to us in the equity fund space,” he said. “In an era of inflation and high interest rates, innovation with products that generate a decent and stable income will continue to attract attention.”
The last word
According to ETFbook, there are more than 2,750 exchange-traded products (ETPs) listed in Europe, making fund selectors well-served, especially in the core equity component.
While the rise of active ETFs is a trend that cannot be ignored, fixed income is an area of potential disruption for smaller ETF issuers entering the market.
This article first appeared in ETF Insider, ETF Stream’s monthly ETF magazine for professional investors in Europe. To read the full version, go to click here.
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