Fixed income ETF adoption set to outlast pandemic
Active and thematic ETF demand continues to rise
The increased adoption of fixed income ETFs is set to outlast the pandemic which caused mass adoption, with 66% of investors globally set to increase their exposure, according to Brown Brothers Harriman's Global ETF survey.
In March 2020, 42% of investors responded to the pandemic-induced market collapse by purchasing fixed income ETFs, the survey revealed, and they are set to stick with the passive bond funds over the course of 2021.
Managers from Greater China are particularly keen on the asset class, with 76% stating they would continue to increase their allocation to fixed income ETFs, followed by US managers at 67% and European managers at 52%.
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US Treasury ETFs are the most popular option for investors, with 40% of global managers set to add the funds to their portfolios this year, followed closely by mortgage- or asset-backed securities ETFs at 38% and Treasury Inflation-Protected Securities ETFs at 36% of global investors.
Concerns still surround the passive model of access to bonds, however, with 34% of investors worried about the liquidity of underlying bonds, 27% uncertain about expense ratios and 23% concerned for trading volume.
Thematic ETFs are also set to benefit from positive investor sentiment, with 80% of global investors set to increase exposure to the asset type, with internet/technology (33%), robotics and AI (19%), and environment/sustainability (14%) themed ETFs poised to enjoy the greatest inflows.
The demand for active ETFs has continued to rise, with 65% of global investors wanting to increase their exposure to the model, although they appear less popular in Europe, with 50% of investors hoping to add to the asset class, compared with 71% of US and Greater China managers.
In the US, 91% of investors say they will "definitely" or "possibly" buy an active ETF within the next six months, although 5% are still uncertain of what a semi-transparent, active ETF even is.
The only ETF strategy that ranked in the top three most wanted funds across the US, Europe and Greater China was cryptocurrency, demonstrating a global demand for the heavily debated asset.
Globally, ESG strategies remain extremely popular, with 82% of investors intending to increase their allocation to all ESG products (not just ESG ETFs), although a point of saturation may be approaching in Europe, where 67% of investors intend to add to the asset class, a drop of 6% on the previous year.
ESG ETF performance remains the biggest concern for investors, referenced by 42% of managers globally, with a lack of client interest (28%) and cost issues (17%) following in second and third place.
Methodology and framework also worry investors, with 13% concerned about the lack of consistency within ESG products.
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ETFs more generally are also set to continue their rapid ascent, with 76% of US, 62% of European and 76% of Greater China investors all anticipating an increase in their use of the passive model over the coming 12 months.
Shawn McNinch, global head of ETF services at BBH, said: "2020 was a year of volatility, but it was also a banner year for ETFs.
"The resiliency of the ETF structure and supporting capital market infrastructure saw them not only weather the storm but cement their status as a go-to option for investors to trade, especially in times of market stress."
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