How ETFs are innovating fixed income
Global X’s Marc Jocum reflects on how ETFs have transformed fixed income, with a next wave of innovation set to drive further change for investors.
The investment structure of an ETF has democratised fixed income for everyday investors, allowing them to buy and sell these securities via the share market with greater affordability and liquidity.
Last year saw fixed income ETF flows sit on par with equity ETF inflows for the first time, with $6.5 billion being invested into fixed income ETFs in 2023, according to Global X. This represented 43 per cent of total market flows, the highest proportional level recorded.
“The growing proliferation of fixed income ETFs has enabled access for investors to diversify their portfolios to access securities that were once cumbersome and costly to obtain,” wrote Jocum, product and investment strategist at Global X.
Since the first Australian government, semi-government and inflation bond ETFs were launched in 2012, the local fixed income ETF market has grown to more than 70 products.
The second wave of innovation in this space, according to Jocum, was corporate bond ETFs that first emerged in 2015. This year also saw the growth of global developed and emerging market bond ETFs, providing Australian investors with international exposure. In 2017, floating rate notes and hybrid securities were introduced.
More recently, the early 2020s has seen more specific fixed income products launched, such as a greater focus on US fixed income, allowing for more granular exposure in client portfolios.
Jocum explained: “Innovation in fixed income ETFs is likely to continue with the development of more nuanced products providing exposure to specific areas of the bond market to help investors try to achieve their desired exposures and outcomes.”
In particular, the product and investment strategist projects the next wave of innovation to see existing fixed income strategies being packaged up into one tradable security, targeting a particular sector.
“There will continue to be a push in product innovation by ETF issuers to offer more solutions catering to investor needs. With passive income and portfolio protection being common goals for Australian investors, ETFs can help investors access the fixed income asset class through a more liquid, low-cost, and tax-efficient means.”
While fixed income was once considered a “boring asset class” compared to its shinier counterparts, it now sits front of mind for Australian investors during market uncertainty and interest rate pathway deviations, Jocum added.
“ETFs are changing the fixed income game, making sophisticated investment strategies more accessible, and empowering investors to have greater choice in adding defensive exposure and income enhancements in their portfolios.”
AUTHOR
Jasmine Siljic
Recommended for you
Magellan has announced a raft of executive changes including the departure of head of investments Gerald Stack after 18 years and a second appointment from Maple-Brown Abbott.
Morningstar research of seven active Australian asset managers has found they are expected to see client redemptions averaging 3.1 per cent of their FUM per annum through to FY29, with two forecast to lose more than 10 per cent.
Franklin Templeton is to get rid of its Martin Currie branding and fold them into the wider group under ClearBridge Investments and Franklin Equity Group.
The widespread use of alternatives could lead to erosion of the very elements that make them alternatives, according to EY, as fund managers make them more palatable to retail clients.
