Tuesday, September 18 , 2018 Stamford, CT USA — Diminished liquidity in global bond markets is fueling demand for fixed-income ETFs among institutional investors in Europe and the United States. 

A large majority of the institutions in the most recent Greenwich Associates Fixed-Income ETF Study say they face increasing challenges in trading, liquidity and security sourcing. The situation appears particularly tough in Europe, where an eye-opening 78% of institutions say trading, liquidity and security sourcing in fixed-income markets has become more challenging. Sixty percent of study participants report that it’s become more difficult to execute large bond trades over the past three years. Over two-thirds of respondents overall reported these changes are impacting their investment management processes.

Due in large part to these market liquidity and trading cost issues, 60% of institutions have increased their use of bond ETFs in the past three years, with allocations now averaging roughly 18% of total fixed-income assets. 

“A majority of institutions around the world now consider bond ETFs as an alternative vehicle for fixed-income exposure and liquidity,” says Greenwich Associates Managing Director Andrew McCollum and author of Institutions Turn to ETFs for Bond Market Liquidity. 

Institutions that have stepped up their use of bond ETFs value the versatility of funds as a portfolio tool, employing them to obtain narrow and broad fixed-income exposures in both high-level strategic functions and targeted, tactical applications.

One-third of current ETF investors plan to increase bond ETF allocations over the next 12 months, with European institutions planning to boost ETF allocations an average of 19%, and U.S. institutions targeting increases of almost 30%. 

“Based on those results and investors’ continued concerns about bond market liquidity, Greenwich Associates expects steady and perhaps even accelerating growth in bond ETF usage and investment among U.S. and European institutions for the next three to five years,” McCollum concludes.