BlackRock surpasses the $1 trillion mark in bond ETFs

The business of global bond ETFs from BlackRock's iShares has surpassed the impressive $1 trillion mark, representing about 40% of the $2.5 trillion global bond ETF market. According to Steve Laipply, Global Co-Head of Bond ETFs at BlackRock, this marks the beginning of a long-term trend towards increased inflows into bond ETFs. Laipply attributes this to the aggressive interest rate hikes by the U.S. Federal Reserve during the early days of the pandemic when bond yields were significantly lower. According to Laipply, these hikes opened the door for investors to reconsider fixed-income securities. Before the pandemic, investors had to compromise both credit quality and liquidity to achieve decent returns. The higher interest rates attracted many investors to money markets and short-term bond ETFs. Laipply sees the growing likelihood of a Fed rate cut as the next growth phase for bond ETFs. "You have to go back to 2004 to see the returns we saw at the beginning of 2023," says Laipply. "As the Fed begins to lower rates and the attractive yields at the short end of the curve wane, there will be renewed momentum for long-term yields." According to Laipply, fund flows into bond ETFs are already moving in anticipation of Fed policy, as institutional investors and financial advisors know that Fed decisions are difficult to predict. Year-to-date, the iShares Core U.S. Aggregate Bond ETF (AGG) leads the field with inflows of $15 billion, followed by the iShares 20+ Year Treasury Bond ETF (TLT) with $10.8 billion. Beyond Fed policy, bond ETFs are also benefiting from a fundamental shift in investor perception, according to Laipply. The spike in volatility at the start of the pandemic in 2020 was a "stress test for bond ETFs," as investors, particularly institutional investors, increasingly turned to these securities. BlackRock reports that global bond ETF assets currently account for almost 2% of the $140 trillion global bond market, with this figure projected to rise to $6 trillion by 2030. "Money is on the move due to the normalization of yields," says Laipply. Structural trends such as model portfolios, advisory fee-based models, and institutional investors favoring fixed-income ETFs also contribute to this growth. Active bond ETFs are currently growing four times faster than passive strategies, making them a "modernizing force in the bond market.