US Asset Managers and Exchanges:Fixed Income ETFs-A Primer.FI ETFs Poised for Greater Growth as Market Seeks Better FI Liquidity

We see Fixed Income ETFs as one of the most exciting growth opportunities forthe asset management industry today. While still in the shadow of the much largerand more liquid Equity ETF marketplace, we see Fixed Income ETFs at the earlystages of a multi-year boom in AUM, product proliferation and liquidity. We seegrowth both among retail and institutional investors, but see particularly interestby pension funds, insurance companies and mutual funds as they try to navigateincreasing liquidity concerns in the fixed income markets. Amongst assetmanagers, we see BlackRock and Invesco as possible winners. Amongstexchanges we see ICE as the bigger beneficiary.

    Fixed Income ETFs – a smaller but faster growing market. The FixedIncome ETF market is a small but fast growing market. The FI ETFs manage~$425bn of AUM in the US and account for ~1.5% of cash equity tradingvolume. The FI ETF business is dominated by BlackRock with 50% share ofAUM and sales, with Vanguard a distant second. Invesco ranks fourth in AUM,but leads the nascent Fixed Income Smart Beta element of the Fixed IncomeETF business.

    Fixed Income ETFs poised for growth. We see the likelihood of significantgrowth in FI ETF AUM, trading volumes and listings over the next five years.While FI ETF AUM is majority retail, we see the more exciting growth storycoming from institutional clients that can better navigate liquidity challengesthough the FI ETF markets. Furthermore, we see FI ETFs as particularly wellpositioned in collateral management given new money market rules beingimplemented next month. On the retail side, we see more limited performanceand tax drivers to FI ETFs, and rather see retail growth pulled along with thecontinued success experienced by Equity ETFs. We forecast 750FI ETFs by2021, with nearly $1.2tr of AUM generating trading volume of 500mn-600mnshares per day.

    Asset Managers and Exchanges look to benefit, Retail Brokers appeardisadvantaged. We believe asset managers are positioned to benefit from themigration to FI ETFs, with BlackRock and Invesco the best positioned of thepublicly traded managers, and cash managers potentially losing market share toETFs. We don’t see the big negative to active managers in fixed income as wehave seen in the equity markets. We see ICE benefitting from trading, listings,indexes and data around FI ETFs. We see retail brokers disadvantaged sincethey make more money on the brokering of funds than from the brokering ofETFs.