Investors Use Bond ETFs to Sidestep Broken Fixed-Income Markets
One reason for the surging popularity of fixed-income exchange-traded funds is that money managers, pension funds and other investors are using them to prepare for a flooded bond market when interest rates rise. Because ETFs are so easy to trade, they allow portfolio managers to react quickly to credit events.
By Julie Segal
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Exchange-traded bond funds are on a roll. They gathered $70 billion last year, a 31.4 percent increase over 2011, according to New York–based asset manager BlackRock. The obvious explanation is that investors want low-cost, transparent strategies for their savings. But there’s another reason for the soaring popularity of fixed-income ETFs. Money managers, advisers, pension funds and insurance companies are using these easily traded funds to prepare for the day when interest rates begin climbing, bonds lose value and investors scramble to sell into a market still largely dependent on weakened Wall Street dealers.
In the wake of the financial crisis, the big banks have only committed a fraction of the capital needed to maintain orderly and liquid fixed-income markets. Thanks to regulations that compel banks to hold a certain amount of reserves, and proposals like the U.S. government’s Volcker rule that force banks out of proprietary trading, investors find it much harder to buy and sell fixed-income securities. “The question is, how will the buy....