With interest rates near all-time lows, the role of fixed income is certainly a question that is top of mind for many investors today. We believe that even as global central banks – including the Bank of Canada –anchor policy rates near zero that fixed income remains a critical part of any investor’s portfolio. Whether it’s to help diversify against equities, to pursue income or to put your cash to work. For example, a core allocation to higher quality fixed income can add stability to an investor’s equity allocation, providing balance during periods of market stress. And for investors who are looking to generate a certain level of income, an exposure to credit such as investment grade corporates, high-yield or emerging-market debt can help achieve that objective. And lastly, in today’s low-yield environment, many investors are looking for alternatives to cash or cash alternatives that can help them earn a little bit more and are turning that cash into fixed income shorter-duration solutions.

Since the first fixed income ETF was launched almost two decades ago, we’ve seen global industry assets cross US$1 trillion in assets under management. And while that is a tremendous number, it actually represents less than one percent of global fixed income market cap. So we believe there’s still a lot of opportunity for continued growth. In fact, we believe that global industry assets will double by 2024 to reach US$2 trillion as different types of investors from individual users, to wealth managers, to institutions use ETFs in more and different ways. And specifically, there are really four drivers that we think have been driving the usage of fixed income ETFs. The first has been growing adoption by institutional investors. The second is the evolution in portfolio construction, where investors are moving beyond the traditional active versus passive debate and utilizing ETFs as transparent building blocks in their portfolio construction process. And the third driver has been the modernization of the bond market more generally. And the last driver is constant ETF innovation, specifically in important areas like ESG solutions.

We see clients really turning to fixed income to solve two key challenges in their overall portfolios. The first is a need for diversification through an allocation to higher quality bonds. And the second is the need for income as interest rates remain at or near all-time lows. On the first theme of equity diversification, despite how low central banks are keeping policy rates, we still believe that an allocation to higher quality fixed income, such as longer-duration government bonds, can be an effective balance during periods of market stress. With uncertainties around COVID-19 and the lingering impact of the global economy continuing to support bond prices at the same time as we’ve seen stock market volatility remains quite elevated. And this has really underscores the need for investors to maintain an allocation to higher quality bonds in their portfolio. Broad market exposures, like the iShares Core Canadian Universe Bond Index ETF (XBB) offers negative correlation to stock markets, which can help reduce overall risk in a portfolio. At the same time, on the second theme of seeking income, with interest rates at all-time lows, investors are really looking different ways that can help achieve their income objectives. Particularly as cash or money market funds offer minimal amounts of interest that barely keep up with inflation. So an allocation to credit such as investment grade corporates or high-yield bonds can be an attractive source of income. And we believe these sectors today are supported by decent valuations, improving liquidity dynamics and a relatively positive technical backdrop.

We find that different types of investors use ETFs for different purposes. But the overarching theme for all investors is that fixed income ETFs provide simple, transparent and efficient ways for them to construct diversified bond portfolios. For instance, for individual savers, ETFs can be a good way for them to help generate income. For asset managers including BlackRock, portfolio managers utilize index-tracking ETFs as part of their investment toolkit. And for asset owners, like pension plans, they rely on ETFs for greater liquidity, lower costs to implement their more complex LDI strategies. More broadly, I would say during periods of market stress like we saw during the first quarter of 2020, investors increasingly turned to fixed income ETFs as a way for them to manage risk, to allocate capital or to adjust positioning. And during that really unprecedented period of market volatility, fixed income ETFs held up and performed as expected – providing investors greater price transparency, access to liquidity and immediacy to trading when they needed it the most.