Buying and selling bonds isn’t a straightforward process. Investors wanting to liquidate a portfolio of fixed income securities face an involved process of phone calls to try and sell each and every bond.
It’s time consuming and complicated—and it’s a process that the Employees Retirement System of Texas avoided altogether two years ago when it had to shed its position in investment grade corporate bonds.
As Institutional Investor’s Julie Segal reported recently, the fund used ETFs to reposition its entire $26 billion bond portfolio. First it negotiated with ETF sponsors over which bonds in its portfolio would fit their ETFs. The fund used a market maker to deliver those securities over to them in exchange for ETFs. They then sold the ETFs easily and quickly.
As Institutional Investor reports, deals like this are becoming more common as large investors find it harder and harder to maneuver in today’s bond markets. Fixed income ETFs are becoming a huge part of the landscape. Since 2008, daily trading volume for U.S. bond ETFs has grown 700%, averaging $3.5 billion a day.
Bond ETFs are also a growing presence in institutional portfolios. A study earlier this year from Greenwich Associates found that 59% of institutional investors using fixed income had increased their use of the products since 2011. Moreover, 40% planned to increase their allocations in the next 12 months. For these investors, liquidity is the top concern—and that’s a relatively new phenomenon. Consider that back in 2010 only 3% of institutional users of bond ETFs were doing so for liquidity purposes—in 2014, that number leapt to 55%.
And it’s not just pension plans—hedge funds are using them as well. Hedge fund Passport Capital attracted a lot of attention when it pulled its entire $217 million stake in BlackRock’s long-term U.S. Treasuries ETF—about 4% of the ETF’s total assets.
The prevalence of large investors in the bond ETF space is a key trend in the ETF space right now. As investors like Employees Retirement System of Texas look for innovative ways to use them to build and maintain liquidity within their portfolios, the industry will expand and respond as a result. And negotiating directly with ETF providers to sell of individual securities is another interesting step in the evolution of the business.