BlackRock CEO Larry Fink is super positive about fixed income Exchange Traded Funds. The cynic in me says of course he is - he sells them. ETFs have done a lot to transform the way people invest in stocks, and hopefully will have some interesting effects on fixed income as well.
The fixed income market can be very opaque. While the stock exchange exists to bring together everyones offers to buy and sell a stock, bonds are often sold dealer to dealer - you have to search around for a good offer. While the US treasury market is the most liquid in the world, there are plenty of lower quality corporates that don't trade frequently.
ETFs can be traded quickly and frequently. This may help bring some liquidity to the underlying markets, especially where they can open up new exposure. Stock funds allow easy access to all sorts of stocks - foreign and emerging stocks, small cap stocks - that can be hard to reach individually. Fixed income funds are similarly opening up more areas for investors (local currency denominated emerging high yield corporates, anyone?). Bringing money and light to these areas should be positive for the markets, improving liquidity, pricing and transparency.
While we do make much use of fixed income ETFs here at New Perspectives, we are monitoring the space for potential, while using active, open ended funds right now.
Disclosure - author is long PCY, ELD, JNK.
Independent, Fee-Only Financial Advisor
