BlackRock Expert Perspective: Behind the Boom of ETFs
Tell us about yourself, your background and how you came to be your current role at BlackRock?
Darren Wills, Managing Director, APAC Head of Fixed Income iShares and Institutional Index for BlackRock.
Mr Wills’ cross-functional team is responsible for supporting client engagement for both institutional and wealth investors, creating thought leadership on fixed income markets and index products, driving new product innovation and launches, partnering with fixed income broker/dealers, and evolving the platform and ecosystem.
Previously, Mr Wills was the investment lead for the EMEA iShares and Index portfolio management team within the Global Fixed Income group, where he was responsible for the management and oversight of all fixed income ETF and index investments in Europe. Prior to that, he was the senior portfolio manager responsible for corporate credit exposures across both the index and systematic active product ranges in EMEA.
Mr Wills' service with the firm dates back to January 2008, including his years with Barclays Global Investors (BGI), which merged with BlackRock in 2009. Prior to joining BGI in 2008, Mr. Wills worked as a Fixed Income Portfolio Manager at State Street Global Advisors, responsible for managing global and single currency corporate credit bond portfolios.
Can you tell us about iShares and how you came to be the largest fixed income exchange-traded funds (ETFs) provider?
iShares unlocks opportunity across markets to meet the evolving needs of investors. We launched the first U.S.-domiciled bond ETFs in July 2002 innovations that went on to break down many barriers to fixed income investing.1 Bond ETFs connected the fragmented fixed income markets with transparent and liquid on-exchange trading, creating an entirely new class of building blocks for assembling fixed income portfolios. For the first time, all investors could buy a portfolio of bonds, with the click of a button, for a known bid-ask spread and relatively low fee.
At iShares, we now offer the largest selection of 280+ fixed income ETFs across 10 domiciles and continue to evolve our product range to suit client needs.2 This includes ETFs that domicile and provide access into the Asia Pacific bond markets, run by a robust team of fixed income portfolio managers and specialists in the region, designed as transparent and efficient solutions for investors’ financial needs.
It’s been said that ETFs are the new golden eggs for investors – is there any truth in this or is it just hype?
A movement that started with four iShares bond ETFs has now grown to US$ 1.7 trillion in assets under management (AUM) and more than 1,400 products around the world. Global investor assets in bond ETFs have grown by 23% annually—double the growth of open-end bond mutual funds and triple the growth of the global market for bonds itself.1
Over the past decade, ETFs have reshaped the world of investing with their key benefits that offer to investors:
- Simple. ETFs combine the efficiency and simplicity of on-exchange trading with the merits of index-based investment strategies.
- Liquid. ETFs tend to be highly liquid, and can be bought and sold during the trading day
- Cost effective. ETFs generally offer lower management fees than actively managed funds invested in the same market and/or assets
- Transparent. ETFs are relatively straightforward and transparent in their investment objective, as well as mostly transparent in their holdings
- Broad exposure. With one trade you can get instant access to a diversified portfolio of securities.
As investors recognise the benefits of ETFs, which enhance investor access across different investment themes in an efficient and cost-effective way, we should continue to see the AUM of ETFs growing across the region.
Investors have become more sustainability conscious over the past several years. How does this play out in the fixed income space? What are the key considerations when using sustainable fixed income ETFs?
The growth in global sustainable fixed income ETF AUM has grown to over US$ 50 billion, a 150% annual growth rate since 2015, as the number of funds available to investors has grown to over 100 at the beginning of 2022.3 We believe the growth is likely driven by the same reasons of sustainable indexing, which are versatility, transparency, consistency, ability to drive change and resilience.
Today’s bond investors can use sustainable indexing increasingly to dial up sustainability as a way to manage long-term risk, target objectives such as reducing carbon emissions at the portfolio level; or comply to the regulatory environment that increasingly requires a sustainable approach.
There is no ‘one-size-fits-all’ approach to sustainable investing – and when investing sustainably, investors need to quantify the measurable output of their investments. ETFs are valuable in that they offer a transparent, standardized, and rules-based approach to meeting specific sustainable investing goals.
What trends do you see continuing to propel fixed income ETF adoption?
The global bond ETF industry is growing faster than we expected. The pandemic era accelerated bond ETF adoption in ways that are self-reinforcingand, we believe, enduring. It took 17 years for bond ETF industry AUM to reach US$ 1 trillion.
Three years ago, as the industry approached this milestone, we forecasted that global bond ETF AUM would double by the end of 2024. Yet we believe the global bond ETF industry is poised to reach US$ 2 trillion in 2023—18 months early—despite currently challenging macro economic conditions. 4
To reflect the faster-than-expected growth trajectory and the acceleration of four secular trends: We have upgraded our outlook in May 2022 projecting that global bond ETF AUM will reach US$ 5 trillion by the end of 2030 based on four powerful bond ETF growth trends.4
- Building blocks in evolved 60/40 portfolios
- Tools for seeking active returns
- Catalysts for modernising bond markets
- Increasingly precise sources of potential returns
In the ETF markets, do you believe we are going to see more electronification? If so, how will they affect portfolio trading and basket trading?
We have seen more electronification in the ETF markets, in particular with bond ETFs. Bond ETFs are reshaping fixed income market structure by helping to drive advances in electronic trading and algorithmic pricing of individual bonds.
These advances enable more primary and secondary ETF market transactions and expand the number of individual bonds that can be priced and traded daily. The pandemic quickened the pace of ETF-driven market modernisation, and we expect bond ETFs will play an even greater role in the way investors access fixed income markets for the foreseeable future.
Electronic trading and sophisticated pricing allow broker-dealers to simultaneously buy or sell large numbers of individual bonds through so-called portfolio trades. This basket-centred marketplace favours even greater acceleration of bond ETF adoption since a growing number of fixed income transactions either directly or indirectly involve bond ETFs for sourcing or hedging risk.
What do you find most valuable about being a partner of FIFX APAC?
The Fixed Income Leaders Summit APAC brings together leaders, experts and participants across the industry in the region, giving us a great opportunity to connect and share views on various topics.
I look forward to having an engaging discussion on ESG fixed income with the panellists in the Summit. It’s been 3 years since we last met before the pandemic. I’m excited about connecting with all participants and industry players, sharing insights and perspectives related to fixed income and ETFs in November.
Sources:
1. BlackRock, “All systems go,” May 2022.
2. iShares Global Business Intelligence, as of 31 July 2022. iShares has fixed income ETFs listed in Australia, Canada, Germany, Hong Kong, Japan, Mexico, Singapore, Switzerland, United Kingdom and United States.
3. BlackRock, as of 24 Jan 2022.
4. BlackRock, “All systems go,” May 2022. There is no guarantee that any forecasts made will come to pass.