How the pros use bond ETFs

A recent report shows that as bond markets evolve, large institutional investors are finding new ways to use ETFs. Their learnings may be helpful for smaller investors as well.

Rising rates and market uncertainty have many people taking a second look at their bond portfolios–not just sector exposures but the vehicles they use to gain those exposures. More and more, investors are moving away from individual bonds and turning to exchange trade funds (ETFs) for their simplicity, low cost and diversification.

Large institutional investors have been big adopters of bond ETFs. As Greenwich Associates found in their new report, 60% of institutions in the U.S. and Europe have increased their use of bond ETFs in the past three years, with an average allocation of 18% to their fixed income portfolios.

A changed bond universe

One of the major forces driving the move to ETFs is the evolution of the bond market since the financial crisis. Heightened capital requirements have made it more expensive for dealers to hold bonds in inventory. As a result, despite the growing U.S. bond market, it has become more challenging for institutional investors to source the fixed income exposures they need. Indeed, two-thirds of institutional investors have felt the impact of diminished liquidity on their investment management process.

bond inventoryFinal

So how are large institutions navigating this new bond market? Enter the fixed income ETF. On the market since 2002, the structure allows investors to trade bonds on exchange, like a stock ETF, thus offering multiple layers of liquidity through primary and secondary markets.

icon-pointer.svg Learn more about how bond ETFs work.

78% of institutional investors also cited the operational efficiency of the ETF structure. Bond ETFs make it possible to gain near immediate exposure to a portfolio of securities in a single line item, without the operational costs and complications of chasing down single bonds. For example, the iShares Core U.S. Aggregate Bond ETF (AGG), has over 6,800 holdings and a net expense ratio of just 0.05%.1 Acquiring that many bonds would be unimaginable even for a large institution. Even if an investor could track down the bonds, the transaction costs would be overwhelming.

An all-purpose vehicle

With over 350 fixed income ETFs currently offered in the United States, investors are most likely able to find a fund to fit their needs. Whether for broad market exposure or niche tactical plays, the motives for using ETFs are etf use

Fixed income ETFs aren’t just for big investors; they have democratized the markets for all investors by making bonds easier to access than ever before. Now anyone can invest like a professional.

Matt Tucker, CFA, is the iShares Head of Fixed Income Strategy and a regular contributor to The Blog.

Net expense ratio shown reflects contractual fee waiver in place through 6/30/26. Gross expense ratio is 0.06%.

This study was sponsored by BlackRock. BlackRock is not affiliated with Greenwich Associates, LLC, or any of their affiliates. Greenwich Associates conducted interviews with 87 institutions in the United States and Europe that currently utilize bond ETFs in their portfolios. The goal of this research is to understand trends impacting the fixed-income investment landscape and the evolution of fixed-income ETFs. Respondents include investment managers, insurers, institutional funds, and (in the United States) registered investment advisors (RIAs).

Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting or Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.

Investment comparisons are for illustrative purposes only. To better understand the similarities and differences between investments, including investment objectives, risks, fees and expenses, it is important to read the products’ prospectuses.

Transactions in shares of ETFs will result in brokerage commissions and will generate tax consequences. All regulated investment companies are obliged to distribute portfolio gains to shareholders. Diversification and asset allocation may not protect against market risk or loss of principal.

Shares of iShares ETFs may be bought and sold throughout the day on the exchange through any brokerage account. Shares are not individually redeemable from the ETF, however, shares may be redeemed directly from an ETF by Authorized Participants, in very large creation/redemption units. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained.

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