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Investors Back ETFs for Bond Exposure

Professional investors are increasingly turning to ETFs for their fixed income allocations

Annalisa Esposito 26 September, 2019 | 11:00AM

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Professional investors are planning to ramp up their exposure to fixed income over the next three years, according to research from Tabula Investment Management, with many planning to use exchange-traded funds to access the asset class. 

The average proportion of professional investors' portfolios invested in bond ETFs is expected to rise from 7% today to 12% by 2022. 

While passive funds tracking fixed income markets are not as widely used as those which track equities, more money is starting to trickle into these funds. Indeed, the number of investors with 10% of more of their fixed income exposure in ETFs is set to double from 16% to 33% in the coming three years. 

The findings follow a trend of investors de-risking their portfolios away from equities towards fixed income in recent months, as gepolitical uncertainty continues to weigh on investor sentiment. Morningstar Direct data shows that more than £1.2 billion was invested into bond funds in August alone

Morningstar analyst Jose Garcia Zarate says: "In terms of fund flows, 2019 has been the year of fixed income and bond ETFs have benefited strongly from this trend."

Indeed, according to Morningstar data, year to date flows into fixed income ETFs across the whole of Europe reached €39.5 billion (£35 billion) to the end of August. Meanwhile, flows into equity funds so far in 2019 have been a comparatively paltry €2.8 billion (£2.5 billion). 

Investors are increasingly starting to appreciate the advantages of holding their positions in bond assets through index-track products such as ETFs. One of these is diversifcation; an ETF allows investors to add hundreds of bonds to their portfolio in a single trade and through a low-cost vehicle.

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Michael John, chief executive at Tabula, thinks investors' appetite for ETFs is increasing because the funds are "easier to control and the strategy you are getting is clear" and offer a broad exposure to an asset class at a low cost. 

He adds: "Where different active managers have different ways of doing things, depending on their style. A passive approach gives you a very specific exposure because it simply tracks an index." 

Of the professional investors surveyed by Tabula, currently 32% have no bond ETFs in their porfolios. This is expected to fall to 19% by 2022. Meanwhile, the proportion of investors with between 11 and 20% of their fixed income allocation in ETFs is expected to rise from 9% today to 19% in three years time. 

The relatively low-cost of ETFs compared to many active funds is also a major attraction, particularly in a low-yield environment. As central banks across the world continue to hold interest rates at rock-bottom levels or even cut them, fund charges eat into precious returns.

Still, not all investors are yet convinced of the merits of ETFs for their bond exposure. While bond index funds have seen inflows of €56.9 billion year to date, this is less than a third of the €176.6 billion that has been invested in active products. Indeed, none of the investors surveyed by Tabula had more than 50% of their fixed income allocation in ETFs, and just 1% expect to have such an exposure by 2022. 

Zarate says: "Even though it has been a good year for bond ETFs and index funds, still most of the money invested in fixed income in Europe so far this year has been allocated to active funds." 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Annalisa Esposito  is a data journalist for Morningstar.co.uk

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