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BlackRock sees bond ETFs doubling to US$2 trillion in 5 years

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BlackRock is bullish on the future of exchange-traded funds (ETFs) that invest in bonds.

[NEW YORK] BlackRock is bullish on the future of exchange-traded funds (ETFs) that invest in bonds.

The world's largest issuer of ETFs sees global debt funds more than doubling to US$2 trillion over the next five years, according to a report Wednesday.

Among the reasons, the New York-based company lists four long-term trends, including modernisation of the bond market and growing adoption by institutional investors.

"There is tremendous runway for growth," Carolyn Weinberg, global head of product for BlackRock's iShares, and her colleagues wrote.

"We envision a not too-distant future in which individual investors move beyond individual bonds, and more asset managers pursue active fixed income strategies with index tracking ETFs as building blocks."

The bond ETF universe represents less than 1 per cent of assets in the US$105 trillion global fixed-income space, according to BlackRock.

Signs of growth are already showing with investors betting big on US debt funds this year as risks of an economic slowdown linger amid global trade tensions.

All that growth puts increased attention on debt funds as some analysts say ETFs could amplify systemic risk in turbulent times. That could unfold if market makers, which play an important role in the price of ETFs, step away during turmoil, according to a recent report from Moody's Investors Service. Less liquid asset classes would bear the brunt of the pain, the ratings company said.

BlackRock also sees investors paying closer attention to costs, which could help draw funds to ETFs because they can execute complex portfolio strategies often for lower fees than alternatives like mutual funds.

"Bond ETFs have transformed how all investors access fixed income markets," the firm's analysts wrote. "The movement is only beginning."

BLOOMBERG