Investors calling for fixed income ETF innovation are having their wishes answered by issuers as new and interesting strategies come to market.
The latest to hit the shelves was the Fair Oaks AAA CLO UCITS ETF (FAAA) in August – tracking collateralised loans that offer potentially higher yields relative to similarly rated loans – which has “excited” fund selectors.
Nathan Sweeney, CIO of multi-asset at Marlborough, called the launch a “compelling development in the fixed income space” and was only able to launch via jumping through various regulatory hoops.
It comes as fixed income ETFs in Europe are on track to better or at least match last year’s record $70bn inflows into the asset class, the strongest year on record. Bond ETFs have seen over $53bn net inflows in the nine months to the end of September, according to data from ETFbook.
While macro conditions have created an environment for fixed income to thrive, the ability to control duration exposure using the wrapper has often been lacking and something fund selectors have been calling for since it became apparent “bonds are back”.
One recent innovation helping investors in this case was fixed maturity ETFs. The ability to remain nimble while navigating the US Treasury yield curve has been a major asset to portfolios, allowing precision when pinpointing where investors want to be on the yield curve.
Since launching last year, BlackRock’s iBonds range has grown to $5.4bn, with $3.2bn coming in 2024. The market has since broadened out from US Treasuries to include German bunds and Italian BTPs.
Sterling-denominated corporate bond ETFs are yet to be launched however – surely the next port of call for this product type – but issues around liquidity make creating these a challenge.
Further innovation in this space is expected, with active fixed income ETFs likely to provide investors with more tools.
The potential for these ETFs to take advantage of interest rates, credit spreads and changing economic conditions and – if managed successfully – will be able to provide an important source of alpha for investors.
Janus Henderson’s recent acquisition of fixed income specialist Tabula was born out of the opportunity to disrupt this space, while it may have lost the race to launch Europe’s first CLO ETF, the group is well positioned to take advantage.
Vanguard, who also have active bond ETFs in the US, also said this was an area of interest, recently declaring the “new era of fixed income investing” came with “a lot of opportunity”.
One area where this has been explored is high yield, serviced by the AXA IM US High Yield Opportunities UCITS ETF (AHYT), which leverages the same research as the AXA WF US High Yield Bond fund.
Performance Trust has also come to market with an active bond ETF – the Performance Trust Total Return Bond UCITS ETF – mirroring the performance of the $8bn Total Return Bond fund in the US.
Instead of trying to predict interest rate risk, the ETF contains bonds that are much less sensitive to interest rate changes and offers protection whether rates rise or fall and has returned 9.5% over the past year.
With interest rates falling across the US, Europe and the UK, fund selectors are certainly better served to capture the opportunities through ETFs than they were a year ago, but there is still plenty to come in the fixed income ETF space.
