At the Bloomberg ETFs in Depth – The Next Wave of Innovation conference, Bondbloxx Co-Founder Leland Clemons appeared along with Fidelity’s Greg Friedman, WisdomTree’s Rick Harper, and Bloomberg’s Nick Gendron to discuss Fixed Income ETFs 4.0.
“Fixed Income is a lot more interesting today than it was a year ago,” Gendron said. 2022 has been a year unlike any other year for Fixed Income, which is down 10–15%. You have to go back to 1994 to get the second-worst year on record, which was only a 2.4% dip.
Fixed Income saw $210 billion in inflows in the ETF market, speaking to the resiliency of the vehicle considering the scale of how challenging the market has been. Clemons noted that the challenging markets have brought more investors to ETFs, particularly short term bonds, in a flight to safety.
“The ETF has become battle-tested and exposures have broadened and widened out. Comfort among investors with ETFs has grown tremendously,” Harper said, praising the vehicle’s transparency. The WisdomTree Yield Enhanced U.S. Aggregate Bond Fund (AGGY) has started seeing flows pick up in the last month.
Fixed Income 4.0 Is Just Around the Corner
Friedman quipped that as the resident ETF person he’s become “one of the most popular guys at Fidelity,” as ETFs take a larger and larger portion of the fund asset pie. He sees conversions as likely to increase dramatically over the next 12–36 months.
Today’s environment, despite its challenges, presents opportunities for fixed income investors. “The income is back in fixed income,” Clemons said, and there is a possibility that a tectonic shift from equities to fixed income is underway.
“There are more opportunities,” Harper said, noting how much more comfortable investors are with certain products even in challenging circumstances. He continued, “a year ago there was nobody in the world comfortable going to a 30-year bond in a risk-off environment.” He sees the evolution of the fixed income ETF as continuing as more and more products come online. “There’s still a lot of runway left for Fixed Income ETFs.”
Active and Passive Fixed Income
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In the past two years, active has started growing, with roughly half of new products launching in the last two years in the fixed income space being active — a huge uptick from prior periods. “The gap between active and passive is going to shrink,” Friedman said, noting that a smart portfolio tends to have both types of products in it.
“Fixed Income ETFs are dramatically underrepresented in choice relative to equity,” Clemons noted, concurring that Fixed Income ETFs have a lot of space to grow still.
“There’s always a little bit more discretionary management with fixed income ETFs,” Harper said, noting that even passive fixed income funds require some active decision making. “There’s a general level of comfort with active management in fixed income.”
2023 Trends and Beyond
Looking ahead to the coming year, Clemons thinks more investors will use ETFs as placeholders instead of cash. Short-term in particular will see a lot of attention. “Clients drive innovation in how they will use ETFs,” he continued, predicting outsized growth for fixed income ETFs. Friedman also sees fixed income ETFs as continuing to grow, particularly active products.
Harper said, “we’ve had two disastrous markets in the last 13 years. Clients are concerned about their downside.” He sees an increase in use of options and other downside protections in the fixed income ETF space.
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