There is a common misconception that Exchange Traded Funds (ETFs) are for equity investors only. This false impression may be driven purely by the fact that like equities exchange traded funds are listed on stock exchanges. The truth is vastly different though as in recent years, the universe of ETFs has been rapidly expanding to include almost every asset class, sector, and investment goal manageable.
When looking at ETF trends one can often focus on the US markets. The greatest concentration of ETFs are those listed on the New York Stock Exchange, a group that also includes the largest ETFs in the world. What is noticeable is how investors are indeed using ETFs to access other asset classes. Last year was a record bumper year for ETFs with the flows into US-listed ETFs just over $507bn. According to calculations performed by etf.com the biggest recipient of these flows for the second consecutive year was US fixed income ETFs, outperforming flows into US equity ETFs.
It is easy to see what investors like using ETFs for their fixed income exposure. ETFs are cheaper than Mutual Funds. As an example, the Vanguard Total Bond Market ETF (BND) has an expense ratio of just 0.035%pa. These very low fees are achieved by having large assets under management and when investing in lower yielding instruments, such as fixed income, fees need to remain low. Investors also like the diversification of the fixed income ETFs. The self-same BND holds 9 995 different fixed income instruments with exposure to various capital markets and durations.
ETF pessimists have long warned that ETFs don’t do well in times of crisis but since the Covid crash these warnings were proved to be incorrect. During the crash capital markets were brought to their knees but the overall market infrastructure held up, and ETF trading continued to function smoothly. In fact, ETFs ended up providing the liquidity into the market when the underlying instruments were illiquid. A white paper from Invesco, an ETF issuer, stated that US-listed fixed income ETFs traded a total of $739bn on exchanges in March 2020, with just $20bn redeemed in the primary bond market in that month. This means that $719bn of fixed income ETF shares changed hands without a real bond actually being sold – a strong indication of ETF liquidity. The further evidence of fixed income ETF liquidity is that when the US Federal Reserve conducted their bond buyback program they chose to utilise the ETF market.
Whilst the focus of this article has been more towards fixed income ETFs it is important to note that there are ETFs for several asset classes. One can access commodities such as gold and silver, one can access real estate, and one can even access smart-beta strategies via the ETF market. Remember ETFs are so much more than just equities.
Magwitch Offshore is a leading provider of Global Balanced ETF portfolios with products in all major currencies. Magwitch utilise an advisor distribution model and their portfolios are available through offshore endowment structures provided by some of the larger Insurers.