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Discovering Certainty and Income Payments in Short-Term Bond ETF.

By Juliette Fairley

NEW YORK (MainStreet)--Investor concern for potentially rising interest rates is causing a surge of inflows into shorter duration fixed income assets, according to Blackrock.

About $21 billion has moved into fixed income ETFs this year with $15 billion flowing into assets with less than three years in duration.


"Last year short duration took in nearly nothing and was almost flat the first four months of the year," said Matthew Tucker, head of iShares Fixed Income Investment. "This year it's been a driver of flows."

The trend prompted Blackrock to launch four iShares Bonds with shorter maturities of three years, five years, seven years and ten years, allowing individual investor to buy a basket of 90 corporate bonds in one trade for as little as $100 that will liquidate in three or five years.

"The iShares bond is designed to bring together the benefits people enjoy about our traditional ETFs such as exchange liquidity, diversification and precision and combine them with the benefits people like about bonds mainly regular income payments and a known end date to the investments," said Tucker.

Greenwich Associates released its annual study this week on how ETFs are being used. The report found that while nearly 90% of institutions use ETFs for domestic equities exposure and 74% use ETFs for international equity portfolios, ETFs are gaining traction in the fixed income space with 55% of institutions investing in domestic fixed income ETFs.


"While some may consider ETFs passive investment vehicles, the Greenwich survey results demonstrate that institutions are using ETFs actively to achieve better strategic and tactical investment outcomes," said Daniel Gamba, head of BlackRock's iShares Americas Institutional Business.

Usage of domestic fixed income is most common among insurance companies at 78% while 74% of RIAs employ ETFs in domestic fixed income. overall, institutional investors are employing ETFs more and more for strategic rather than tactical purposes. Tactical is defined as holding an investment for less than a year.

"As a result of the Volker Rule, Dodd Frank and Basel 3 coming online, banks and broker dealers are less able and capable to hold inventory for bonds than they were five years ago," said Tucker. "That means it's harder to trade fixed income today so trading volume is down because there's less inventory readily accessible."

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