Advisors Will Fuel Bond ETF Asset Growth

Equity-based exchange-traded funds are still the kings of the ETF universe, a throne unlikely to be relinquished anytime soon, but data suggest bond funds will be integral components of ETF growth. Increased adoption among financial advisors is seen as a significant growth frontier for bond ETFs.

Equity-Based ETFs And Their Appeal

A recent survey conducted by Cerulli Associates in conjunction with BlackRock, Inc. BLK, the parent company of ETF giant iShares, confirms advisors are expected to ratchet up their use of bond ETFs.

“Advisors are increasingly gaining comfort in using bond ETFs to build portfolios and continue to plan to move assets away from mutual funds and individual bonds,” said CFRA Research Head of ETF & Mutual Fund Research Todd Rosenbluth in a note out Monday. “Yet, relative to equity ETFs, more advisors favor the diversification and ease of exposure benefits of these products, while viewing performance as less meaningful.”

The Breakdown

As CFRA noted, bond ETFs combine for 18 percent of ETF assets under management, but represent 28 percent of this year's inflows. This year, investors have been favoring short-term bond ETFs, such as the iShares Core 1-5 Year USD Bond ETF ISTB and Vanguard Short-Term Bond ETF BSV.

Part of the reason ISTB and BSV are popular with investors are paltry annual fees of 0.08 percent and 0.07 percent, respectively.

“ISTB's three-year track record as of May 31 of 1.41 percent was ahead of BSV's 1.13 percent. The iShares product sports a higher yield, due to greater exposure to investment-grade corporate bonds and less exposure to government bonds,” said Rosenbluth.

High-yield funds, including the iShares iBoxx $ High Yield Corporate Bond HYG, PowerShares Fundamental High Yield Corporate Bond Portfolio PHB and SPDR Barclays High Yield Corporate Bond JNK, are also expected to be big drivers of bond ETF growth among advisors.

“PHB has more in BBB-rated securities (13 percent of assets) than its peers, while JNK takes on more credit risk and has 16 percent in bonds rated CCC or higher; HYG has more diversification across the credit rating buckets that PHB and JNK. These ETFs have a combined $30 billion in assets under management,” said Rosenbluth.

CFRA has Overweight ratings on the aforementioned junk bond ETFs and Market-Weight ratings on BSV and ISTB.