In my year-in-review blog, I noted that fixed income market conditions in 2011 turned out to be pretty much the opposite of what investors were expecting. With that in mind, I am well aware of how difficult it is to offer predictions for 2012. But I did want to provide a few insights into how I expect the fixed income ETF landscape to evolve this year.
One trend I definitely expect will continue is the launching of new fixed income ETFs. 2011 was a strong year for new products, with 102 new fixed income funds launching across exchanges in Europe, Canada, Asia and the United States. As of December 6, the total number of fixed income ETFs globally had grown to 467, according to data from BlackRock and Bloomberg.
Within the United States there have been a total of 39 new funds launched this year. One of the big trends has been the introduction of funds that offer exposure to bond markets outside the United States. For instance, this year we saw new funds launch that provide exposure to offshore Chinese Yuan denominated bonds. Broad local currency emerging market debt funds also launched that offered investors additional ways to access non-US dollar bond markets. In Europe, product launches focused on gaining access to non-Euro zone markets, like the United States or emerging markets.
With 115 new fixed income ETFs filed with the Securities and Exchange Commission as of December 6, this will be another busy year for fixed income ETF launches. The most popular sector for new filings is broad market, with 23 applications. This is followed by 16 filings for international developed ETFs and 14 filings for investment grade credit fixed income ETFs.
Based on the pipeline, more active mangers appear ready to get into the ETF game. The active managers that have filed for fixed income ETFs have chosen to start with broad market and active short duration funds.
| Investment Objective | Launched | Filed |
| Active | 23 | 42 |
| Index | 129 | 44 |
| Leveraged/Inverse | 17 | 29 |
| Total | 169 | 115 |
Source: SEC EDGAR and BlackRock’s HEARSAY database
The continued growth of the fixed income ETF market should provide investors with even greater clarity into fixed income market movements. It is now possible to see and track investor behavior in fixed income by watching fixed income ETF trading volume and fund flows. For many investors this is providing them with real-time data on bond market movements for the first time. The expansion of the fixed income ETF market will allow all investors to see investor sentiment expressed on an even larger number of markets.
Bonds and bond funds will decrease in value as interest rates rise. In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.
