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Four Factors Are Driving Future Growth of Fixed Income ETFs

By:

Head of SPDR Americas Research

Although the traditional allocation to bonds in a moderate portfolio is 40%, fixed income exchange traded funds (ETFs) represent just 20% of the overall US-listed ETF industry.Despite the smaller share, fixed income ETF assets under management have grown at a faster pace than equity ETFs, 78% versus 68% over the past three years.2 That growth will likely accelerate due to four factors: Cost, Choice, Client Need and Comfort. 

Let’s examine the Four “C factors” that will drive  future investments in fixed income ETFs:

Factor 1: Cost

Fees have been a main driver of buying behavior over the past three years. Sixty-three percent of the $977 billion invested in ETFs has been directed to low-cost core exposures.3

Because cost can be relative to an asset class and specific to a subsector (e.g., a low-fee emerging market (EM) debt fund is more expensive than the low fee US Treasury fund, but it is still low fee relative to its peers), we examined flow patterns at the subsector level, based on Morningstar classifications, breaking each bond category into fee quartiles (Quartile 1 = low fee for its category, Quartile 4 = high fee for its category). 

As shown below, over the past three years, $431 billion more flowed into the first quartile expense ratio funds in a given Morningstar Category (including ETFs and mutual funds) than into fourth quartile.Flows ($Billions)Mutual Funds and ETFs: Flows By Morningstar Category Fee Quartile

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1Source Bloomberg Finance L.P. as of 09/30/2019. Calculations by SPDR Americas Research.
2Source Bloomberg Finance L.P. as of 09/30/2019. Calculations by SPDR Americas Research.
3Source Bloomberg Finance L.P. as of 09/30/2019. Calculations by SPDR Americas Research.
4Source: Morningstar as of 08/31/2019, calculations by SPDR Americas Research. 
5Morningstar as of 09/30/2019.
6With the exception of funds that do not have a full three year track record as of September 2019.
7Source Bloomberg Finance L.P. as of 09/30/2019. Calculations by SPDR Americas Research.
8Source Bloomberg Finance L.P. as of 09/30/2019.
9Source: Bloomberg Finance L.P. as of 09/30/2019, calculations by SPDR Americas Research. 

Originally Posted on November 22, 2019 – Four Factors Are Driving Future Growth of Fixed Income ETFs

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