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Liquidity, Flexibility, and Transparency in Bond ETFs

More and more, institutional investors are turning to ETFs to help solve fixed income challenges.

ETFs are now a mainstream and even primary means of investment exposures in the fixed income portfolios of U.S. institutions. Sixty percent of institutional investors who participated in a recent research study conducted by Greenwich Associates say they invest in bond ETFs1, up from just 20% in a similar study in 2017.

The forces driving the uptake of ETFs in fixed income strategies are multitude. As an investment vehicle in their holistic equities and fixed income portfolios, investors feel that the flexibility of ETFs overall provides solutions to many challenges, and more than 40% use them for risk management in this holistic sense. In their fixed income portfolios specifically, 70% of investors say they use bond ETFs for the broad exposure and diversification they can achieve through a single trade.

One of the most widely used high-yield bond ETFs is the iShares iBoxx $ High Yield Corporate Bond ETF (HYG).2 The popularity of HYG may align with investors’ preference to diversify with a single trade, and to seek higher income through exposure to an index composed of U.S. high yield corporate bonds.

Alternative to traditional liquidity sources

In combination with advances in electronic trading, the “wrapper” structure of bond ETFs allows them to be bought and sold on the open exchange just as stocks are, providing an additional layer of liquidity and public transparency into pricing. This quest for liquidity is hardly a surprise. Concerns about liquidity in over-the-counter (OTC) markets have weighed on investors for years. ETFs provide an alternative to OTC, with potential benefits for investors.

Among asset managers surveyed for the Greenwich report, 90% point to liquidity as a primary reason they opt for bond ETFs, and with good reason – an ETF can sometimes be more liquid than the underlying securities. Look no farther than 2018 for proof, when near-record inflows of $98 billion for U.S. bond ETFs were accompanied by record-setting secondary trading volumes that reached an average daily trading volume of $8.5 billion3 – a significant increase of 41% from 2017.

One of the most actively traded ETFs by investors seeking liquidity is the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), which has an average daily trading volume greater than 80% of Dow Jones Industrial Average stocks4. LQD provides access to more than 1,000 high quality corporate bonds in a single fund, providing wide-ranging exposure for investors pursuing income.

Low management fees a plus

As usage of bond ETFs has increased, so has an appreciation for the low fees associated with them. In fact, 83% or more of institutional investors cite low fees, liquidity, quick access, and ease of use as the top reasons they veer toward bond ETFs. All of these preferences are present in iShares ETFs indexed to iBoxx, including HYG and LQD, which along with yield potential and low cost provide investors with knowledge that they are following a market leader – more than $123 billion ETF assets under management are benchmarked to iBoxx indices5

The tremendous growth in the use of bond ETFs by institutional investors does not appear as if it will slacken in the foreseeable future – bond ETFs currently account for less than 1% of the $105 trillion global bond marketplace6. In short, the end of the potential runway for bond ETFs isn’t even in sight yet.

Learn more about how to make your fixed income portfolio more liquid, flexible, and transparent.

1Source: Greenwich Associates 2018 U.S. Exchange-Traded Funds Study. Based on interviews with 181 institutional investors, including investment managers, institutional funds, insurance companies, RIAs, and other types of institutional investors, between 10/2018 and 12/2018. BlackRock sponsored the study and is not affiliated with Greenwich Associates. Unless otherwise noted, the Greenwich Associates 2018 U.S. Exchange-Traded Funds Study is the source of all data in this story.

2 Source: Bloomberg, based on 20 Day Average Volume.

3 Source: BlackRock, Bloomberg, as of 12/31/18. All U.S. fixed income ETFs across all issuers.

4 Source: BlackRock, Bloomberg, as of 12/31/18. Volume based on full-year average.

5 Source: IHS Markit, as of May 2019.

6 Source: Bank of International Settlements, as of December 2018.

Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses which may be obtained by visiting and Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.

Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.

Buying and selling shares of ETFs will result in brokerage commissions. Diversification and asset allocation may not protect against market risk or loss of principal.

When comparing stocks or bonds and iShares Funds, it should be remembered that management fees associated with fund investments, like iShares Funds, are not borne by investors in individual stocks or bonds.

Shares of iShares ETFs may be bought and sold throughout the day on the exchange through any brokerage account. Shares are not individually redeemable from the ETF, however, shares may be redeemed directly from an ETF by Authorized Participants, in very large creation/redemption units.

There can be no assurance that an active trading market for shares of an ETF will develop or be maintained.

This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This material is strictly for illustrative, educational, or informational purposes and is subject to change.

The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, "BlackRock").

The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Markit Indices Limited, nor does this company make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with Markit Indices Limited or any of their affiliates.

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