THE JOURNEY TO$1 TRILLION.Visualizing the meteoricrise of bond ETFs
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HOW THE BONDETF CHANGEDTHE GAME.
Not long ago, getting exposure to fixed income securities, such as bonds, was cumbersome and highly specialized.
Despite the bond market being significantly bigger than the equities market, bonds still largely trade over-the-counter (OTC) and not on a centralized exchange. This means bonds are typically harder to access, in contrast to stocks.
Traders used to mostly trade bonds over the phone, negotiating prices and making deals.
However, this “old school” method came with several limitations:
However, the innovation of the bond exchange-traded fund (ETF) was an inflection point for the industry.
Bond ETFs trade on open exchanges like stocks, making them more accessible to investors.
Over the last two decades, they’ve helped to transform and democratize the bond market. Let’s take a look at how this rapidly rising segment of the market took off, and what the future may hold for bond ETFs.
High transaction costs
To gain access to the bond market, investors traditionally had two options:
Information was proprietary
Bonds were not always liquid
The market lacked true transparency
buying actively-managed mutual funds
buying individual bonds themselves—often a time-consuming and inefficient process.
1 2
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$1 TRILLIONAND BEYOND.A timeline of the journey to $1 trillion in global assets under management (AUM).
The ETF shakes up the fixed income market and bond ETFs launch for the first time in the U.S.
Here is how the bond ETF market works:
2002A new way to trade bonds
Authorized ParticipantsBuyers and sellers can transact with each other through the exchange
ExchangeBuy & Sell
ETF Shares
Cash
ETF Shares
Cash
Seller
Primary Market Secondary Market
Creation
Redemption
ETF issuer
Buyer
buy or sell underlying bonds that make up the fund
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Gave investors easy exposureto government bonds (such as Treasuries), which historically are a low volatile investment*
Government bond ETFs
Funds that hold Treasury Inflation- Protected Securities (TIPS), which are indexed to inflation
TIPS ETFs
Investment-grade* corporate bonds derive from companies with a low risk of default
Corporate bond ETFs
Seeks to track the Bloomberg Barclays U.S. Aggregate Bond Index, an important indicator that aims to replicate the overall size and scope of the investable bond market
Aggregate bond ETFs
Just one year in, and there are already numerous types of bond ETFs that allow investors to fulfill different needs:
Investors could now harness the simplicity of ETFs to buy different types of bonds, typically used to:
2003More variety
Diversify portfoliosfrom stock market risk
Seek stability frominterest rate risk
Target consistentincome
*Rating signifying high credit quality, implying a low risk of default
*Low volatility based on high credit rating which typically has a low risk of default
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$25billionThe global bond ETF industry
hits $25 billion in AUM.
2006Achievement unlocked
The universe of bond ETFs continues to expand as investors demand access to even more kinds of bonds.
2007Bond ETF innovations
Investments representing an ownership in a pool of many mortgages
Higher-yielding corporate bonds
Exposure to municipal bonds issued by cities, states, counties, or other local governments
Mortgage-backedsecurity bond ETFs
High yield bond ETFsMuni bond ETFs
Source: BlackRock GBI (as of June 2019)
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Liquidity for individual bonds dries up during the 2008 Financial Crisis.
However, bond ETFs help provide a new source of liquidity and volume increases, allowing investors to efficiently access the fixed income markets.
2008A new source of liquidity
Largest high yield bond ETF price
volume
Source: Bloomberg (12/31/07-6/30/09). Volume shown is daily trading volume. Largest high yield bond ETF is represented by the iShares iBoxx $ High Yield Corporate Bond ETF (ticker: HYG). Based on the fund's AUM ($17.7B) as of 6/30/19. For illustrative purposes only. There can be no assurance that an active trading market for shares of
an ETF will develop or be maintained. Past performance does not guarantee future results.
$100
$90
2.5M
2.0M
1.5M
1.0M
0.5M
$80
$70
$602008 2009
2008 2009
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The first term-maturity ETFs launch.
These special bond ETFs specifically hold bonds that all mature in the same year. In the year of maturity, the funds liquidate and return the proceeds to investors.
2010More precise strategies
At this time, factor-based bond ETFs start to hit the mainstream.
Factor-based bond ETFs use a rules-based approach to employ multiple investment factors, such as:
They are transparent andsystematic, but also giveinvestors precise exposureand sophistication to helpachieve their objectives.
2015More product innovation
Low Volatility Quality
MomentumValue
$250billionThe global bond ETF industry
hits $250 billion in AUM.
2012Achievement unlocked
Source: BlackRock GBI (as of June 2019)
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In the U.S., iShares iBoxx $ High Yield Corporate Bond ETF (ticker: HYG) trades more than 24 of the 30 stocks in the Dow Jones Industrial Average.*
In Europe, banks turn to bond ETFs for exposure, and MiFID II regulations come into effect.
Key bond ETFs start to trade at higher volumes than many of the most actively traded stocks.
2018Unprecedented volume
Green bonds
2017Green bond ETFs provide investors withthe ability to invest in bonds that are tiedto sustainability purposes.
$500billionThe global bond ETF industry
hits $500 billion in AUM.
2016Achievement unlocked
Source: BlackRock GBI (as of June 2019)
*Source: Bloomberg, BlackRock, S&P Dow Jones, as of 12/31/18. Volume based on full-year average. There can be no assurance an active trading market for shares of an ETF will develop or be maintained.
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2018Market volatility and bond ETFs
In the second half of 2018, markets get volatile, and investors turn to bond ETFs to help reduce their overall portfolio risk, specifically diversifying their exposure to stocks.
Hypothetical growth of $100
iShares U.S. Treasury Bond ETF (ticker: GOVT) volume35M25M
15M5M
2019Dec Mar Apr May JunNovOctSepAugJul
2019Dec Mar
Feb
Feb Apr May JunNovOctSepAugJul
$1trillionIn June 2019, bond ETFs hit $1 trillion in
global assets under management, with now over 1,300 bond ETFs available globally.
2019Achievement unlocked
Source: BlackRock GBI (as of June 2019)
$115
$110
$105
$100
$95
$90
$85
S&P 500 Index
ICE U.S. Treasury Core Bond Index
Source: Bloomberg (7/1/18-6/30/19). Volume shown is daily trading volume. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one
cannot invest directly in an index. Past performance does not guarantee future results. Index performance does not represent actual iShares Fund performance. For actual fund performance, please visit www.iShares.com or www.blackrock.com.
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THE PATH TO$2 TRILLION.
Why do institutionalinvestors turn to bond ETFs?
According to Greenwich Associates, there are three reasons*:
Bond ETFs today are already known for their competitive performance, low cost, and tax efficiency.
As the future unfolds, innovations will likely continue. This could allow all types of investors—from individuals to wealth managers, to institutions—to continue finding different ways to use bond ETFs in their portfolios.
83% of respondentssay liquidity drives their use of bond ETFs.
Liquidity Ease of Use Quick Access
In just 17 years, bond ETFs have grown to be a significant part of the investment universe.
According to BlackRock, global bond ETF assets will double to $2 trillion by 2024.
Source: BlackRock GBI (as of June 2019)
*Source: Greenwich Associates 2018 U.S. Exchange-Traded Funds Study. Based on 108 respondents. Study sponsored by BlackRock.
2002 2005 2009 2013 2017 2019YTD
2024
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Learn more about the future of bond ETFs at iShares.com
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. There may be less information on the financial condition of municipal issuers than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. Some investors may be subject to federal or state income taxes or the Alternative Minimum Tax (AMT). Capital gains distributions, if any, are taxable. Mortgage-backed securities ("MBS") and commercial mortgage-backed securities ("CMBS") are subject to prepayment and extension risk and therefore react differently to changes in interest rates than other bonds. Small movements in interest rates may quickly and significantly reduce the value of certain mortgage-backed securities. TIPS can provide investors a hedge against inflation, as the inflation adjustment feature helps preserve the purchasing power of the investment. Because of this inflation adjustment feature, inflation protected bonds typically have lower yields than conventional fixed rate bonds and will likely decline in price during periods of deflation, which could result in losses. Government backing applies only to government issued securities, and does not apply to the funds.
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There can be no assurance that performance will be enhanced or risk will be reduced for funds that seek to provide exposure to certain quantitative investment characteristics ("factors"). Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. In such circumstances, a fund may seek to maintain exposure to the targeted investment factors and not adjust to target different factors, which could result in losses.
Buying and selling shares of ETFs will result in brokerage commissions. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained.
This material represents an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.
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