“You could get a handful of bonds or you could buy an ETF that gives you very broad diversified access to the whole category—depending on the segment you’re buying you’re talking about hundreds of securities. So this makes it easy and efficient to trade fixed income.”
Superior liquidity is another advantage of ETFs, says Wiley, noting the structure combines the best aspects of a mutual fund and a stock.
“You’re getting broad exposure to the market like a fund, but it trades on the exchange like a stock which means investors can get in and out of a position very easily and fine tune their portfolio; in this market environment that becomes very important.”
This makes rebalancing relatively easy. If an investor expects a change in interest rates, he or she may want to shorten the duration of their fixed income portfolio to reduce interest rate risk. The fixed income ETF universe includes both short- and long-duration mandates, allowing the investor to reorient their exposure with two quick trades.
ETFs also offer advantages over the traditional mutual funds, as active managers may take on more risk in an effort to outperform their benchmark.
“When we look at the history and the data, it tells us that active management is really hard to do,” Wiley says. “Managers don’t consistently outperform the index. When you look at fixed income, the range of those able to outperform is fairly narrow.”
“If you can get access to the market at a low cost, and just mimic a segment of the market, driving your costs down in a low interest rate environment, chances are you’re going to be better off.”
Wiley believes ETFs will continue to grow in popularity for fixed income exposure. Investors need a bond component in their portfolio, she notes, and an ETF is going to be “one of the most efficient and effective” ways to get that exposure.
“I don’t see demand for income going away anytime soon,” she says. “Anything that gives an investor a steady stream of income is going to be appealing and fixed income ETFs are going to meet that demand.”