As ETF investing continues to rise around the world, a big proportion of recent flows is going into fixed income products. In the first two-and-a-half months of this year alone, US$14 billion of a total of US$37 billion flowing into ETFs went to bond funds.
The ETF growth phenomenon, until recently concentrated in the retail, largely unadvised, investor market in Australia, has also started to broaden out among financial planners and institutions.
According to Jonathan Howie, the BlackRock Australia head of iShares (the firm’s ETFs), financial advisers are increasingly turning to ETFs as a way to easily diversify portfolios, such as by adding fixed income exposures for their clients.
Howie was speaking at a briefing in Sydney last week coinciding with the visit to Australia of BlackRock’s head of fixed income iShares for the Americas, Matthew Tucker. Tucker was the person who oversaw the launch of the world’s first fixed income ETF, for investment grade corporate bonds, in 2002. He has been at BlackRock and its predecessor firms for more than 20 years.
Tucker said that only about 20 per cent of the global ETF market was invested in fixed income funds, so the sector was under-represented in terms of the general asset allocation long-term investors could be expected to make to the asset class.
He said that even though interest rates were likely to rise, especially in the US, which would mean a capital loss for fixed income investors, overall rising interest rates were good for long-term investors. They would have to endure some pain only for about two years, he said, before getting the benefit of rising rates.
About half of BlackRock’s iShares business in Australia is institutional but most of those flows go to international funds. BlackRock is the largest provider of ETFs in Australia can also boast the lowest cost fund in the market – the S&P 500-tracking IVB fund, which charges just 4bps. It has six fixed income iShares on the ASX.
“I think we are in the middle of the education process,” Howie said.