The Rising Appeal of Bond ETFs

With choppier markets come tough asset allocation questions for money managers – in particular, where to position their portfolios along the duration curve. Global central banks have been aggressively raising interest rates since 2022, and markets continues to have mixed predictions on when rate cuts will take place in 2024. In periods of uncertainty, exchange-traded funds (ETFs) continue to be a good tool for helping institutions act nimbly in the pursuit of investment opportunities.   

Bond ETFs are a fusion of two of Tradeweb’s major asset classes in terms of platform activity. While the popularity of bond ETFs is not yet in the same league as that of their equity counterparts, the room for growth seems enormous, especially when we consider the fact that bond markets globally are larger than equities markets. Bond ETFs already account for approximately 40% of all trading activity on our ETF marketplace and 69% of trades over $100 million. In 2022, this asset class saw 90% growth in traded volume, followed by similar or higher activity levels in 2023.

Larger fund managers value the transparency and better price discovery benefits of ETFs. Meanwhile, smaller funds tend to appreciate their ease of use, enabling them to gain instant exposure to a broad range of securities at lower transaction costs. Institutional investors  are also using ETFs for cash equitisation purposes, to express short-term tactical views, or to hedge their portfolios.

Credit ETFs have become an important source of corporate bond liquidity in the market, representing 23% of global corporate bond transactions in 2022 (source: Coalition Greenwich). Especially in the context of high yield (HY) corporate debt, ETF transactions now make up 47% of total volume, a proportion that has been on the rise over the past three years (source: Coalition Greenwich), according to the most-recently compiled data from Coalition Greenwich.

The relative cost efficiency of the bond ETF also becomes relevant when we consider trading execution options. Competitive pricing is easier and more efficiently achieved in the ETF market versus in the underlying bond market, particularly for less-liquid HY bonds. Leveraging the request-for-quote (RFQ) trading protocol, which allows traders to send price enquiries to multiple liquidity providers simultaneously, is also another important pricing resource for institutional clients.

In the context of the Asia Pacific region, we are excited to be rolling out the Intraday Net Asset Value (iNAV) initiative with BlackRock this year, which will add price transparency to fixed income ETFs and help encourage adoption of the ETF vehicle. Intraday indications of an ETF’s value are derived based on market prices of the underlying assets. They will be calculated every 15 seconds and provided as a data feed. The product has already seen success in the European market, and we look forward to bringing its high quality ETF price transparency to the APAC region as well.

Tradeweb’s platform continues to provide the crucial over-the-counter liquidity for bilateral trading that is more appropriate for larger trade sizes, while services like iNAV bring greater price transparency across products and geographies. As a leading multi-asset electronic marketplace, Tradeweb is well-equipped to cater to the trading needs of our clients’ fixed income desks. Meanwhile, sell-side liquidity providers are also increasingly quoting bond ETFs alongside the underlying bond prices.  

Fixed income ETFs have seen phenomenal adoption over the past couple of years, and yet the future is still full of promise. As more market participants discover the many advantages of electronic RFQ-based execution, we are well-prepared to support the rapid growth of this asset class.

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