Partner Insight: In the past three years, 90% of net fund flows in the US have been into passive products. Demand has been weaker in Europe but today's trend of low growth could facilitate change.
This is because in today's low growth environment, investing costs matter more than ever. And this is especially true for bond markets, where yields are below their historical averages, says Tim Edwards, senior director of index strategy at S&P Dow Jones Global Indices.
"In a lower yield environment, when dividends and bond yields are lower, actually that cost component in investing becomes more important and it puts the onus on the investor to think about managing the costs and make sure that, if their return is going to be a little bit smaller, they don't want to see that eaten up by fees."
ETFs have modernised fixed income markets and they are making it easier for both retail and institutional investors to invest in fixed income products, potentially gain liquidity and add specific exposures to portfolios. They also serve to enhance transparency and provide investors with low execution cost to establish a diversified portfolio. These benefits have fuelled the increasing acceptance and growing popularity of fixed income ETFs.
"Bond ETFs have been the big growth market in the last ten years," says Adam Laird, Head of ETF Strategy - Northern Europe at Lyxor ETF. "And in many cases the arguments for investing passively are greater with bonds than with equities."
He adds: "We know that yields have been very low, yields have been squeezed and therefore lowering your costs is vitally important in this area. You don't want to be paying back your whole yield in fees."
Before ETFs, many investors relied on active mutual funds or individual securities for access to the bond market. But now with the rise of bond ETF investing investors can build model portfolios, follow asset allocation guidance, or express their own tactical views, all in a low-cost manner.
Indeed fund supermarket Hargreaves Lansdown, which holds nearly £60bn of UK retail investors' assets, says one in 10 investors hold at least one passive fund in their portfolio — up from 6 per cent in 2011
In many ways, bond ETFs have put investors back in the driver's seat. If the growth in equity ETFs is any indication, bond ETFs could continue to grow at double digits and reach $2 trillion in the next 15 years.