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Debt ETFs are the go-to strategy when markets fall, study shows

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Investors in ETFs plan to handle market turbulence by boosting their exposure to bond ETFs, according to a new report from Brown Brothers Harriman.

Buying fixed-income ETFs is the go-to strategy for 20% of investors during periods of heightened volatility, the global survey of 300 institutions, financial advisors and fund managers showed. It’s the second year in a row that this response ranked No. 1.

Debt ETFs are becoming increasingly popular as investors get more comfortable with how they react across different market environments, and as their potential uses become more and more sophisticated. These funds added $150 billion in 2019, according to data compiled by Bloomberg, and more could follow this year.

“Given just the sentiment in the marketplace where people think there could potentially be a bear market on the horizon, I’m not surprised more investors are looking at fixed-income ETFs as a way to hedge some of that volatility,” said Shawn McNinch, global head of ETF services for BBH.

In what was a stellar year for corporates, governments nearly missed the list entirely.
January 8

Investors from China were the biggest enthusiasts of loading up on bond ETFs, with 27% endorsing this course of action, the survey showed. By contrast, U.S. advisors said they were more likely to add to their existing portfolio or trade ETFs intraday to capitalize on market opportunities. Those in Europe advocated holding steady.

The differing responses may hinge on perceptions of liquidity. Globally, liquidity of the underlying bonds remains the top concern for users of fixed-income ETFs, yet U.S. investors are more worried about ETF fees and trading volume. However, uncertainty over the cost of trading is universally regarded as the biggest headwind to further ETF adoption.

Among the other findings:

  • Almost 70% of global ETF investors plan to boost their allocation to ETFs over the next 12 months.
  • U.S. investors would like to see more ETFs that are actively managed or track low volatility strategies.
  • With the first active non-transparent ETFs expected this year, 62% of U.S. investors plan to increase their exposure to actively managed ETFs, up 10 percentage points from 2019.
  • Over the next five years, 30% of global ETF investors expect to have between 11% and 20% of their portfolios in ESG ETFs.
Bloomberg News