A popular alternative for bond investors

But for those looking for exposure to bonds, exchange traded funds (ETFs) are becoming a popular alternative – particularly in the government and corporate bond space.

According to the latest “ETF Landscape” report from the BlackRock Investment Institute, fixed income ETPs gathered 31.6 per cent of all assets flowing into the ETP industry in 2011.

In November alone, the sector gained $3.7bn (£2.4bn) in net new assets.

Globally, ETPs accounted for 33 per cent of all new money that flowed into all bond funds during the first three quarters of 2011.

In 2009 and 2010, by comparison, ETPs accounted for 11 per cent and 10 per cent of assets flowing into bond strategies respectively.

This gain in market share by ETPs has been driven by the increased popularity of fixed income indexing, as well as a trend with investors and advisors towards exercising more control over their fixed income investments through ETPs.

By contrast, actively managed bond funds saw inflows for the first three quarters of 2011 drop to $70bn from $200bn in the first three quarters of 2010.

Kevin Feldman, managing director at BlackRock, says: “In the current and extended low-yield environment, ETPs are attracting huge interest from fixed income investors who are eager to maximise yield and manage their costs.

“This is a truly revolutionary development, signalling that an indexed approach to fixed income investing is becoming as commonplace and as valued as an indexed approach is in the equities space.”

Fixed interest ETFs are certainly cheap. For actively managed bond funds, the average total expense ratio is 1.18 per cent, according to Morningstar. For bond-based ETFs, the average TER is 0.22 per cent.

According to Mr Feldman, the number of fixed income ETPs on offer has mushroomed from 122 in 2007 to 591 today, with more than 110 launched in 2011 alone, and he argues that this growth in product range is likely to continue.

“Providers will be looking at ways they can offer both broad and niche exposures to global bond markets, and this will allow investors to implement customised fixed income asset allocations that mix sectors, geographies, and risk profiles much as they do today for equities,” he adds.

iShares dominates this sector, and data shows that, by assets, the iShares Barclays Capital £ Index Linked Gilt and iShares Markit iBoxx £ Corporate Bond funds were the most popular in the past year.

At £1.06bn, the latter of the two is the largest and tracks the performance of the Markit iBoxx £ Liquid Corporates Long-Dated Bond index as closely as possible, offering exposure to the 40 largest and most liquid sterling denominated corporate bonds with investment grade rating.