Fixed income ETFs: Simple, transparent, low-cost beta exposure

I think we're all well aware how important ETFs have become for investors over the years, though I think a lot of that focus is still on equity ETFs, and probably there is less appreciation for the growth in the fixed income market.

But maybe let's start by you telling us how you've seen the industry develop over the years, and in particular, what role do you see for ETFs in portfolio construction?

As you know, I joined the ETF team in 2020, and since then I've seen this market grow very quickly.

In Europe, fixed income ETF assets have tripled since 2020, from around 250 billion to 750 billion now.

At BNP Paribas, the growth has been even stronger with our assets increasing almost tenfold over the same period.

But honestly, despite that progress, I still think bond ETFs are underused.

They represent just over 10% of the mutual fund market in Europe, while in the US they account for around 30%.

This gives you a clear indication of the growth potential we still have in Europe.

I believe bond ETFs can play several different roles.

They can be used as building blocks in asset allocation.

That's probably the first and most important role they have.

but they can also be used to express tactical views, so in a more short-term horizon.

In practice, what they do is provide pure beta at low cost, and they usually simplify the implementation of investment decisions.

We discussed this point with one of our insurance clients at the beginning of the year.

They used to trade single line directly because they have a team of fixed income experts, but they are now increasingly shifting away from direct bond portfolios and making greater use of ETFs.

They explained that the added value of their investment process lies in the asset allocation decision.

while the execution itself is not a major driver of performance.