Fixed income ETFs provide cost efficient execution

Hamish McArthur I’m Hamish McArthur, this is ETF TV, and I’m here at the Fixed Income Leaders Summit in Barcelona with Jim Goldie of Invesco. We’re here to talk about fixed income ETFs. Jim, welcome to the show.

Jim Goldie Thank you for having me.

Hamish McArthur Who’s investing in fixed income ETFs?

Jim Goldie We’re seeing an increase in usage of fixed income ETFs across the investor spectrum. And that’s evident if you look at the numbers, I think 25% of AUM and UCITS ETFs is in fixed income space, whereas 75% of NNA this year is in fixed income ETFs.

Hamish McArthur And for investors out there, what is NNA?

Jim Goldie That’s net new asset, so net cash flow. Not only can investors use ETFs to gain broad diversified exposure to bond markets, they can also use ETFs to get more targeted exposure. Additionally, ETFs allow the ability to have currency, hedge share classes of a governance and fixed income exposure, which means that investors can access the bond market without having to take on any additional currency risk. Clients are becoming more cost conscious, so they may be navigating towards more cost effective means of getting fixed income exposure.

Hamish McArthur And how are these ETFs being used?

Jim Goldie Clients want to use ETFs more tactically. They have the benefits of being able to access capital markets teams in order to achieve cost effective execution and buy and sell more regularly. But also on the other side, you have clients that use fixed income ETFs for more core exposures, where they may be invested or have core allocations and broad, diversified benchmarks. And rather than trade hundreds of thousands of underlying bonds, they can use ETF to get the same exposure by buying one single security. And for many times it can be a single digit management fees.

Hamish McArthur How does the ETF primary market help promote liquidity?

Jim Goldie In the primary market, which is what we also call the creation and redemption mechanism, ETF creations can be from as little as a few hundred thousand dollars to as much as hundreds of millions of dollars. For some of the smaller trades, it’s not possible to trade thousands of underlying securities, so the primary market tends to go via what’s called the negotiated basket process. And that’s where our portfolio managers will model cash flows on a trade by trade basis, in order to find the most liquid subset of bonds, which still match or mirror the underlying characteristics that the fund is trying to track. This not only reduces tracking errors from the fund vs the benchmark, but also allows the liquidity providers to call very tight spreads in the ETF. And as I mentioned, often the ETF can call tighter than the underlying benchmark that the ETF is tracking.

Hamish McArthur Very interesting. Jim, thanks for your time today.

Jim Goldie You’re very welcome. Thank you for having me.

Hamish McArthur I’m Hamish McArthur, this has been ETF TV at the Fixed Income Leaders Summit in Barcelona. For further reports, please visit ETF TV and for our other reports on other markets, visit TRADER TV. Thank you.

Published on October 18, 2019