In an era of zero interest rates, highly volatile markets, and geopoltical uncertainty, fixed-income exchange-traded funds (ETFs) and actively-managed ETFs may be the best asset class for investors seeking decent returns.

Over the past 12 months, particularly during the pandemic, ETFs have shown their resilience not only in terms of performance but also in providing liquidity and effective trading.

Fixed-income ETFs/ETPs listed globally gathered net inflows of US$19.99 billion at the end of August 2020, bringing net inflows for 2020 to US$160.61 billion, 13.5% higher than the US$147.99 billion in net inflows fixed-income products had attracted in the same period last year, according to data from ETFGI. Assets invested in actively managed ETFs/ETPs finished the month up 8.0% to US$194.18 billion, from US$179.82 billion at the end of June 2020.

The huge inflow into fixed income ETFs came despite reports that there was some dislocation in the pricing (of fixed income ETFs) and that these ETFs were trading at a discount to their net asset value.

“Effectively the reports alleged that the ETFs were mispriced but it was actually the marks in the underlying bonds that were struggling to keep up with the volatility of the market," says Sean Cunningham, head of ETFs for Asia at J.P. Morgan Asset Management. "So you know where the ETF pricing was effectively the fair value of that asset. But the index providers were just putting out marks that were not necessarily where the fair value of fixed income was.

“That issue quickly reversed itself when the volatility started to die down a bit but it gives you an indication that not only were we looking at ETFs as liquidity providers, low-cost vehicles, etc., but at the same time when markets start to get extremely volatile they end up being the best pricing proxy that you have for the fixed income asset class. That’s very important in fixed income where spreads can be wide and really widen out when markets get a bit choppy,” Cunningham adds.

The continued expansion in the volume of fixed income ETFs is expected to continue in the long term as equity markets remain volatile and interest rates persist at extremely low levels.

Despite their massive growth in recent years, fixed-income ETFs represent only 15% of the global funds market with nearly US$1 trillion in assets as of June 30 2020.

“While the growth of these instruments has been robust, they still account for only 2.1% of the total investable fixed income universe. Flows have been strong, but they have not occurred solely at the expense of other types of existing investment vehicles. They have grown the overall market. When it comes to their impact on market prices, these instruments still represent a relatively small portion of sub-asset classes within the fixed-income market,”  according to a report from State Street.

The growing number of fixed-income ETFs launched in 2020 has made it easier for investors to find cheaper actively-managed and passive fixed-income funds.

The growth in actively-managed ETF strategies  is also considered a long-term trend as investors expand the use of ETFs beyond passive investing. “When you look at the ETF launches we’ve had so far this year, more products have been launched in the active space than in the passive space. New issuers are looking for more niche and bespoke exposures that are putting products on platforms. It really highlights that there is huge opportunity in the market for issuers who can manage to navigate that active space,” Cunningham says.