Fixed income exchange-traded funds (ETFs) are poised to take on a bigger role in institutional portfolios, according to a new report.
The Greenwich Associates report, which was sponsored by iShares, notes that American investors are making sweeping changes to their fixed-income portfolios in response to the post-crisis regulatory changes in the bond markets, the current interest-rate environment and expectations of future rate increases.
“As institutions move to shorten duration and find new sources of yield, current users of fixed-income ETFs expect to increase their use of the product and some non-users will elect to employ ETFs in implementing their portfolio strategies,” says Greenwich Associates consultant Andrew McCollum.
The report shows that institutional investors experimenting with fixed-income ETFs quickly begin increasing their use of and allocations to these products.
About 60% of the institutional ETF users participating in the study allocate more than 10% of fixed income assets to ETFs, including almost one-third allocating between 10% and 30%. One-third of institutions now using ETFs say they plan to increase their investments in these products in the next 12 months, including 43% of investment managers and 38% of institutional funds.
Institutions indicated their top application of fixed-income ETFs is a strategic one—to obtain passive exposures in the core component of core-satellite portfolio constructions.
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