ICE Fixed Income monthly report
What’s next for bond ETFs? And what are the ramifications for investors? To help answer this question, our President of Fixed Income & Data Services Amanda Hindlian recently spoke with BlackRock Managing Director and Global Co-Head of iShares Fixed Income ETFs, Steve Laipply. In this edition, you can read a summary of their conversation. And learn how the components of ICE’s Trading Analytics can be utilized in a variety of front, middle and back-office use cases.
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Bond ETFs - their role in advancing fixed income markets
President, Fixed Income & Data Services
ICE
Bond ETFs: they’ve been called “the great equalizer” of fixed income markets, broadening access to an asset class once tapped almost exclusively by institutions. Closer examination shows a plethora of ways in which they exert a growing, positive influence on markets - helping price discovery, liquidity, transparency, and providing a toolkit for investors to manage risk.
So, what’s next for bond ETFs? And what are the ramifications for investors? To help answer this question, I recently spoke with BlackRock Managing Director and Global Co-Head of iShares Fixed Income ETFs, Steve Laipply. Here’s a summary of our conversation:
New trading protocols and algorithmic pricing are accelerating sector growth
Advancements in the ETF create/redeem process have supported other innovations which make client risk-transfer easier, for example, portfolio trading (which grew ~25% last year for investment grade bonds). This protocol allows users to move large bond parcels quickly and efficiently from OTC markets to the exchange.
Algorithmic pricing has become more mainstream, supporting further efficiency in the pricing and trading of bonds. Alongside this, the growth of ancillary instruments (such as derivatives) tethered to ETFs offer new opportunity to investors.
Model portfolios are booming; ETF pricing is becoming more competitive
The use of bond ETFs in model portfolios is coming to the fore, a concept which allows investors to tailor their preferred risk-exposure (such as taking higher risk for higher returns) by using a ”recipe” that can suggest a combination of funds to deliver the target return profile. Model portfolios are scalable, allowing asset managers to quickly rebalance and reallocate funds as market conditions shift. One indication of their popularity: Cerulli estimates asset manager model AUM could increase from $415B to $3.2T in the coming years.
Alongside this, ETF pricing is becoming more low cost, making them even more attractive for use in asset allocation models.
The growing sophistication of ETF strategies
While the first bond ETFs largely delivered broad, index-tracking exposure to entire markets or asset classes, newer ETFs offer increasingly precise and sophisticated strategies. For example, there are defined maturity ETFs allowing investors to build diversified, laddered bond portfolios. There are option overlay strategies enabling investors to potentially generate additional income across investment grade credit, high yield credit, and 20+ year Treasuries. Finally, with the growing popularity of actively managed ETFs , there will be even greater choice in the types of payouts and exposures on offer. Many mutual funds are converting to ETFs, given the ease with which they can be implemented in portfolios. Overall, these developments offer investors a broader toolkit of instruments to help meet their risk-return goals.
Regulators are gaining a greater understanding of ETFs
Regulators are taking a more substantive view of risk exposure when it comes to the trading of ETFs versus individual bonds -- recognizing a need for their constituents to have the flexibility to create appropriate portfolio risk profiles. For example, the National Association of Insurance Commissioners (NAIC) has recognized certain bond ETFs as bonds for statutory purposes. More states are working to harmonize the regulatory templates between bonds and bond ETFs. We’re seeing momentum here build and, long term, we’re likely to see this trend expand.
Bond ETFs have boosted liquidity for high yield debt; indexing is helping refine bond pricing
Bond ETFs have bolstered liquidity for high-yield bonds over time, as these bonds’ inclusion in ETFs saw investors make a positive association with ETFs’ liquidity and transparency. This has seen high-yield bonds trade far more frequently and enjoy better price discovery. In the future, there is likely to be greater opportunity for systematic investing in high-yield.
The growing sophistication of fixed income indexing has also supported innovation in bond pricing and valuation – an area where ICE continues to invest.
Insights
ICE Trading Analytics - Serving fast-evolving fixed income markets
The fixed income market has undergone significant structural changes during the past several years. Enhancements in information gathering, data synthesis, data analysis and trade execution continue to happen on an almost daily basis, creating trading and investment opportunities. Despite these advancements, fixed income trading has not reached the level of electronification currently seen in the equity markets.
The sheer number of securities plus diversity of asset types, security structures, settlement parameters, etc. have hindered progress on this front. As market participants become increasingly adept in processing and applying the vast amount of fixed income market information, that gap with the equity market is closing.
Fixed Income in Focus
Automating trading workflows with data & technology
"Faster. Smarter. More Productive." Dwayne Middleton, CFA, Head of Fixed Income Trading at T. Rowe Price joins ICE’s Michele Nicoletta to discuss the future of the buy-side trade desk, the increasing adoption of execution management systems, using data to automate trading workflows and making the order generation process more efficient.
Events – Tuesday, Oct. 24
ICE Fixed Income Forum
The ICE Fixed Income Forum gathers financial experts and thought leaders to address industry challenges and opportunities and seeks to uncover solutions to help advance financial markets.
Led by a keynote discussion with BlackRock's Co-Head of Global Trading Dan Veiner, this event features panel discussions that explore a range of topics affecting fixed income markets from electronification of trading workflows and advancements in AI/cloud technology to indexing & ETF strategies and valuation best practices.
The event will also feature a fire-side chat with McLaren Racing CEO Zak Brown about the importance of data in racing.
Fixed Income
Manage risk, uncover opportunities, and make informed decisions in real-time with ICE’s end-to-end fixed income solutions. Reimagine your fixed income workflow from price transparency & discovery and efficient execution through to performance analysis.
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