Thursday, March 28

Investors love fixed income ETFs


The Fixed Income ETFs have seen steady growth throughout 2021 to become the second largest asset class among indexed vehicles.

According to Amundi data, corresponding to November, fixed income received 13.6 billion euros, with 10.9 billion in sovereign bond strategies and 2.7 billion in corporate debt.

Although investors initially focused equally on investment grade income and high yield (with a very similar behavior in terms of inflows), the emergence of the omicron variant finally tipped the balance in favor of the first category.

For JP Morgan This evolution is due to the fact that throughout the past year investors have put in value «the ability of ETFs to provide liquid access and efficient from a cost point of view diversified bond portfolios. To make such a statement, JP Morgan experts have relied on a report on listed funds prepared throughout 2021.

Another of the conclusions obtained is that ETFs have proven to be resistant to market turmoil, without producing a distortion between the ETFs and their underlying assets at times of greatest stress.

The three reasons to trust fixed income ETFs

JP Morgan goes a step further and also lists Three Reasons to Love Fixed Income Exchange Traded Funds. To begin with, they explain from the investment bank, there is the fact that they simplify and normalize the bond market since, as experts point out, investing in this environment can become complicated because investors must go to the secondary market.

In contrast, with exchange-traded funds, by being able to exchange the shares of the ETF for an underlying basket of securities, it makes it easier for bond ETF prices to at all times approximate fair value.

Second, JP Morgan points out that ETFs offer multiple advantages related to diversification and gives for example the possibilities that an investor has who tries to reduce the duration of the component of public debt of the United States debt of his portfolio.

“ETFs allow you to build highly diversified bond portfolios through a single ETF,” they emphasize from Lyxor.
Finally, they add liquidity to the investment in fixed income. “The secondary market for ETF funds offers liquidity by being able to carry out operations both inside and outside the market,” they explain.

Inflation Linked Bond ETFs

Despite these considerations, we cannot forget that this year has been a bad year for fixed income.

“And the prospects are similar or worse for 2022,” admits Diego Fernández Elices, General Director of Investments at A&G, who recalls that “most categories of funds and fixed-income ETFs have complex prospects” for two fundamental reasons: the inflation and accommodative central bank policies.

However, investors have been able to find alternatives in these products, as revealed by the flows.

“Fixed income is very diverse and there are always niche opportunities. We like flexible fixed income, which is capable of taking advantage of the opportunities that arise from episodes of volatility, financial subordinated debt and Asian debt”, explains Fernández Elices.

The Fixed income ETFs that use inflation-linked bonds have responded to these challenges as evidenced by the $3 billion inflows recorded in the first five months of the year compared to $4.2 billion for all of 2020.

One of these products would be the iShares Global Inflation Linked Govt Bond, which offers broad exposure to the global market for inflation-linked bonds from developed countries (a return of just over 4 percent was recorded in 2021) or the iShares Hedge Corporate Bond ETF, with positions in investment grade corporate bonds.

Too short duration corporate and sovereign bonds are an option to minimize rate volatility.

In this sense, Víctor Alvargonzález, partner and founder of Nextep Finance, explains the reasons why he prefers ETFs of this type more than vehicles that invest in long-term bonds, since “by having such low commissions, these products do not they eat the coupon.” Several ETFs would be included in this category, such as the Vanguard bond short term ETF, or the Pimco low dur corporate UCITS ETF.

● Consult the fund managers guide of the magazine Investment to know the who’s who of the sector in Spain.



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