Using Bond ETFs: managers’ perspectives

1. Diversification benefits are main attraction over direct approach
2. Managers actively consider issuer type, term and credit quality when allocating to bonds
3. Shift from broad to more nuanced exposures underway

 
We conducted a Survey of senior portfolio managers and decision makers from firms whose combined assets under management is in excess of £500bn.  The survey was designed to get a better understanding on how those managers approach bond investing.
 
Our key findings based on the survey are summarised below:

• Inclusion of bonds within portfolio for implementation of strategic and tactical views is a given
• Managers actively consider issuer type, term and credit quality when allocating to bonds but may be less aware of the range of more nuanced bond exposures now available to reflect these different dimensions
• Managers seem to favour direct bond exposure at present over active funds or index funds/ETFs.
• Adoption of bond ETFs is not therefore linked to the classic active/passive debate, but is more utilitarian in nature.
• Whilst there is reasonable awareness of bond ETFs, we believe there is scope for increasing education around advantages of using bond ETFs over direct securities for diversification and accessibility purposes
• Diversification and targeted exposures were cited as the key benefits, whilst index construction (overweight largest issuers) and liquidity were cited a key concern.
• These concerns show there is a lack of awareness around 1) how bond indices are actually constructed (the largest issuers within an index are not necessarily the most indebted firms), and 2) that whilst bond ETF liquidity is only as good as its underlying assets, the ability to trade bond ETFs on exchange means there is a secondary market which does not existing for traditional active or index funds.

For more information and important notices, view the full report.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: The data in this article comes from an Elston ETF Research report “Bond ETF Investing Survey” that was sponsored by State Street Global Advisors Limited. We warrant that the information in this article is presented objectively. For further information, please refer to important Notices and Disclosures in that Report which is available on our website www.ElstonETF.com
This article has been written for a UK audience. Tickers are shown for corresponding and/or similar ETFs prefixed by the relevant exchange code, e.g. “LON:” (London Stock Exchange) for UK readers. For research purposes/market commentary only, does not constitute an investment recommendation or advice, and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product. This article reflects the views of the author and does not necessarily reflect the views of Elston Consulting, its clients or affiliates. For information and disclaimers, please see www.ElstonETF.com
Image credit: Elston Consulting; Chart credit: Elston Consulting; Table credit: Elston Consulting