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Bond ETFs shake off crisis, poised to double assets within 3 years (Bloomberg Intelligence)

Covid-induced panic selloff on world markets that took place in March painfully hurt almost all asset classes, and bond ETFs were not an exception. The situation has changed dramatically since then, however. Bond ETFs have grown by $50 billion since the depths of the selloff and are posed to double assets within three years, which makes them an interesting long-term investment opportunity, analysts of Bloomberg Intelligence (BI) believe.

Regaining lost assets on way to doubling

Bond ETFs have recovered almost all of the $55 billion in assets lost during the selloff and are approaching their high-water mark of $863 billion.

The organic breadth and depth of bond ETFs' asset gains are signs that growth is here to stay. The $50 billion added in the past month is mostly from inflows, at $30 billion, with the other $20 billion coming from the rising value of the bonds. A big chunk of inflows stemmed from traders front-running the Fed's rescue plan. However, multiple categories are benefiting, not just corporate debt, with over 250 different bond ETFs taking in cash this year. BI analysts believe the crisis enhanced the appeal of bond ETFs to traders, who appreciate their liquidity and low costs.

According to BI forecast, bond ETFs will double assets to $1.6 trillion in the next three years despite receiving scrutiny from critics and pundits for trading at discounts to net asset values in March. The ability to trade bonds like stocks will continue to attract traders while lower fees than mutual funds lure advisers.

History of post-crisis asset growth

Bond ETFs should be able to maintain asset growth despite their recent dislocations from NAVs. Such discounts are nothing new: they were almost as bad or worse during past sell-offs, yet the category's assets have continued to double every few years. In 2008, many bond ETFs traded at wider discounts than in March. In 2018, the discounts weren't quite as large but returns were negative virtually across the board. While the recent sell-off might hurt perceptions of bond ETFs, we expect their liquidity and low cost to continue to attract new investors.

The ETFs have benefited from the lack of an electronic exchange for bonds.

Low fees a magnet for buy-and-hold crowd

While bond ETFs' liquidity will spur greater use by traders, low costs are likely to continue to attract retail investors. A few who panic-sold may look elsewhere, but retail ETF investors usually don't trade much, making discounts a non-issue. They use bond ETFs for the low fees, which remain intact. The average bond ETF charges 31 bps, or 16 bps asset-weighted – less than half the cost of a typical fixed income mutual fund, at 73 bps and 49 bps, respectively. Some ETFs tracking bonds globally and across categories charge less than 10 bps. As return expectations fall, fees will become even more important to investors.


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