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Fixed Income ETFs Were Top Choice for Institutions During Liquidity Crunch

According to a new study, when volatility was heightened and liquidity was scarce, institutional investors turned to bond ETFs.

During the heightened volatility sparked by the outbreak of the Covid-19 pandemic, investors found liquidity, price discovery, usage, and transaction costs to be pressure points across sectors in the bond markets – including high yield, investment-grade corporate, emerging markets, and, for a short time, U.S. Treasuries.

With stress permeating global markets and investment decision-making processes, institutional investors sought relief through the use of fixed income ETFs. According to a global survey of 766 institutional investors, 54%1 increased their use of fixed income ETFs to source, price, and transact in bond markets during heightened pandemic-related volatility. Based on what they experienced and learned during the pandemic an additional 34% say they are likely to increase their use of fixed income ETFs in the future. The survey was conducted by Institutional Investor during Q3 of 2020, meaning investors had time to contemplate how they’d handled volatility in the early days of the Covid-19 pandemic.   

One reason institutional investors say they turned to fixed income ETFs during the elevated volatility of early 2020 was because they helped solve the challenges of bond sourcing and transactions, and in accessing niche areas of the bond markets. Nearly all respondents (95%) encountered trouble sourcing new bonds during the early period of pandemic-related market dislocation, and most institutional investors encountered at least some difficulty while pursuing individual bond transactions (92%). Accessing non-core segments of the bond markets was important to investors as the pandemic sowed volatility, and despite challenges in doing so, 84% of all institutional investors surveyed managed to gain the desired access via ETFs.

Assets under management (AUM) appear to be directly connected to whether or not an institution encountered difficulty in sourcing new bonds, transacting in individual bonds, or accessing non-core segments of the bond market. In fact, during heightened volatility, it appears that barriers to effectively participating in the bond market grew progressively higher as AUM decreased. For example, 61%2 of institutions with $5 billion or less in AUM had great difficulty in sourcing new bonds. By comparison, only 42%3 of institutions with more than $50 billion in AUM experienced the same issue. This pattern held when it came to transacting in individual bonds and accessing niche segments of the bond markets.

Surge in actual and anticipated use of fixed income ETFs

As they look to the next 18 months, 68% of all institutional investors in the study expect continued heightened volatility. In that context, investors plan on increasing their use of ETFs of all types more than their use of any other investment vehicle (65%).

At the outset of pandemic-related financial stress, trading in U.S. fixed income ETFs surged to $1.3 trillion in the first quarter of 2020 – a figure half of the $2.6 trillion for all of 2019.4 In many cases, institutional investors found fixed income ETFs provided more liquidity (61%), greater transparency (46%), and lower transaction costs (40%) than the underlying bond market.5

Ashwin Alankar, Ph.D., who serves as Head of Global Asset Allocation and Portfolio Manager at Janus Henderson Investors shares his experience on managing a portfolio when volatility is high and liquidity scarce. According to Alankar, “During these times, the challenge is trying to trade cost effectively in a market environment where liquidity is compromised. This inflexibility is very costly. And this is where ETFs make the difficult easy giving investors the flexibility to adjust portfolios cost effectively when adjustments are most important. The exchange listed character of ETFs leads to much more efficient clearing of demand and supply so investors have access to liquidity that otherwise may be non-existent or prohibitively expensive; and access to liquidity when stress hits is the single most valuable commodity out there.”

Among investors who participated in the survey, 61%6 said liquidity is the top reason fixed income ETFs can make a good replacement for individual bonds. This feature was clearly a factor when liquidity was otherwise scarce during pandemic-related volatility. A further 55% cited speedy market access as a reason they might replace individual bonds with fixed income ETFs – and 51% said that avoiding the necessity to conduct analysis of individual securities is yet another good reason to make the switch.

The survey also determined that fixed income ETFs are regularly used by institutional investors throughout the portfolio rebalancing and construction processes. It’s hardly a surprise that among all survey respondents 90% rebalanced their institution’s portfolio within six months of the onset of pandemic-related volatility. What is revealing, however, is that ETFs were used in the rebalancing process 70%7 of the time – more than any other financial tool.

Download the fixed income report: Managing Market Volatility in 2021: What fixed income investors did in 2020 – and what they learned.


1 Of 762 respondents.

2 Of 295 respondents.

3 Of 196 respondents.

4 BlackRock, Bloomberg as of 5/31/20

5 Of 759 respondents.

6 Of 671 respondents.

7 Of 692 respondents.

In Q3 2020, Institutional Investor conducted a global survey of 766 institutional investment decision makers at insurers, endowments, family offices, foundations, pensions, and asset management firms regarding their experiences and actions during severe market volatility in the early part of 2020. The study was sponsored by BlackRock. BlackRock is not affiliated with Institutional Investor or any of their affiliates.

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 www.iShares.com or www.blackrock.com. 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.

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

There can be no assurance that an active trading market for shares of an ETF will develop or be maintained. Buying and selling shares of ETFs may result in brokerage commissions. Diversification and asset allocation may not protect against market risk or loss of principal.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

The iShares and BlackRock Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”). BlackRock is not affiliated with Janus Henderson Investors.

©2021 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

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