H2

Month
20182015

Institutions Turn to ETFs
for Bond Market Liquidity

ICR0718U-542482-1740912
CO N TE NTS INVESTORS’ NEED FOR U.S. INSTITUTIONS ARE
NEW SOURCES OF ESPECIALLY BULLISH
2 Executive Summary LIQUIDITY HAS HELPED ABOUT EXPECTED BOND
DRIVE THE RAPID ETF ALLOCATIONS,
EXPANSION OF BOND TARGETING INCREASES

30%
3 Liquidity Issues Fueling Demand
for Bond ETFs ETFs GLOBALLY WITHIN OF ALMOST
INSTITUTIONAL
4 ETFs: A Growing Presence in PORTFOLIOS
Institutional Bond Portfolios

6 Derivatives Users Consider the

ETF Alternative
Executive Summary
6 Bond ETFs on Course
for Future Growth
Diminished liquidity in global bond markets is fueling demand for fixed-
7 BlackRock iShares is Top Bond income ETFs among institutional investors in Europe and the United
ETF Provider States. A large majority of the institutions in the Greenwich Associates
2017 Global Fixed-Income ETF Study say they increasingly face challenges
in trading, liquidity and security sourcing, prompting about 60% to
consider bond ETFs as an alternative vehicle for fixed-income exposure.

Managing Director Due in large part to market liquidity and trading cost issues, 60% of
Andrew McCollum institutions have increased their use of bond ETFs in the past three
advises on the years, with allocations now averaging roughly 18% of total fixed-income
investment assets. Institutions that have stepped up their use of the funds value the
management versatility of bond ETFs as a portfolio tool, employing them to obtain
market globally. narrow and broad fixed-income exposures in both high-level strategic
functions and targeted, tactical applications.

One-third of current ETF investors plan to increase bond ETF allocations

over the next 12 months, with European institutions planning to boost ETF
allocations an average of 19%, and U.S. institutions targeting increases of
almost 30%. Based on those results and investors’ continued concerns
about bond market liquidity, Greenwich Associates projects steady and,
perhaps, even accelerating growth in bond ETF usage and investment
among U.S. and European institutions for the next three to five years.

M ETH ODOLOGY RESPONDENT TYPE

United States1 Europe2
Greenwich Associates conducted interviews with 87 institutions
in the United States and Europe that currently utilize bond ETFs 7% 9%
in their portfolios. The goal of this research is to understand
33% 15%
trends impacting the fixed-income investment landscape and 28%
the evolution of fixed-income ETFs. Respondents include
investment managers, insurers, institutional funds, and (in the
United States) registered investment advisors (RIAs). 76%
32%

RIA Investment Managers

Investment Managers Institutional Funds
Insurance Insurance
Institutional Funds
Note: 1Based on 40 responses. 2Based on 47 responses.

2   |   GREENWICH ASSOCIATES
ICR0718U-542482-1740912
Liquidity Issues Fueling
Demand for Bond ETFs
Traditional bond markets in Europe and the United States are less liquid
than they were before the global financial crisis, making it difficult at A large majority
times for institutions to trade individual bonds. As a portfolio manager of institutional
from a U.S. wealth management firm explains, “Finding good-quality
fixed-income investments that fit the criteria that I look for is one of
investors agree that
my biggest challenges.” traditional bond
market liquidity
Current liquidity issues are due in large part to increased bank capital
requirements put in place post-financial crisis. Heightened capital
has continued to
reserves make it more expensive for banks to hold the large inventories decline over the
of bonds needed to act as market makers. These increased expenses and past three years.
other new rules have forced banks to slash their inventories and pull back
from their prior role of broad fixed-income market liquidity providers.

“The banks don’t have as many positions on their balance sheets

anymore, so they trade less,” says a representative from a Dutch asset
management firm.

DIFFICULT TRADING ENVIRONMENT CREATES CHALLENGES FOR

FIXED-INCOME MANAGERS—PAST 3 YEARS
Ease of Trading, Liquidity, Sourcing Securities
1% 2%

30% 20%
45%
Less challenging
About the same
78%
More challenging
55%

69%

Total U.S. Europe

Note: Based on 70 total responses, 29 in the U.S. and 41 in Europe.
Source: Greenwich Associates 2017 Fixed-Income ETF Study

A large majority of institutional investors agree that market liquidity has

continued to decline over the past three years. The situation appears
particularly challenging in Europe, where an eye-opening 78% of
institutions say trading, liquidity and security sourcing in fixed-income
markets has become more challenging. Over two-thirds of respondents
reported these changes are impacting their investment management
processes.

3   |   GREENWICH ASSOCIATES
ICR0718U-542482-1740912
Sixty percent of study participants report that it’s become more difficult
to execute large bond trades over the past three years, including nearly Nearly 60% of
three-quarters of European institutions and 43% of U.S. investors. Across the institutions
both markets, roughly a quarter say it takes longer to execute a bond
trade now than it did three years ago.
in the study have
increased their use
DIFFICULTY IN TRADING BONDS of bond ETFs in the
Total U.S. Europe past three years.

32% 26%
39%
43%

60%
8% 74%
18%

More difficult to trade large sizes

Less difficult to trade large sizes
About the same

Note: Based on 63 total responses, 28 responses in the United States and 35 responses in Europe.
Source: Greenwich Associates 2017 Fixed Income ETF Study

ETFs: A Growing Presence in

Institutional Bond Portfolios
Investors’ need for new sources of liquidity has helped drive the rapid
expansion of bond ETFs globally within institutional portfolios. Nearly
60% of the institutions in the study have increased their use of the
funds in the past three years, and more than half of current users now
hold at least four bond ETFs in their portfolios. Thirty percent of U.S.
study participants have executed a single ETF bond trade of at least
$50 million, including 14% of institutions that report completing a single
trade of more than $100 million.

USE OF ETFs
Increased Use Size of Bond ETF Trades2
of Bond ETFs1
8%
9% More than $100 M
41% No
27% $51–$100 M

10% $11–$50 M

59% Yes $6–$10 M

46%
$0–$5 M

Note: 1Based on 87 responses. 2Based on 78 responses.

Source: Greenwich Associates 2017 Fixed Income ETF Study

4   |   GREENWICH ASSOCIATES
ICR0718U-542482-1740912
ETF allocations have grown to roughly 18% of total fixed-income assets
among the institutions participating in the study. Study participants
are increasing their use of bond ETFs for two primary reasons: 1) They
provide enhanced portfolio liquidity with relatively low trading costs, and
2) because they are operationally simple, ETFs are easy to use in their
portfolios.

TOP 5 REASONS FOR USING BOND ETFs

Liquidity—low trading costs 80%

Easy to use—operationally simple 78%

Quick access—speed of execution 71%

Single-trade diversification 59%

Avoid need for single security analysis 40%

Note: Based on 86 responses.
Source: Greenwich Associates 2017 Fixed-Income ETF Study

With their versatility as a portfolio tool, institutions in the study are

employing ETFs to obtain narrow and broad exposures in both high-level
strategic functions and targeted, tactical applications. The following
graphic illustrates the five most common ETF applications, including a
mix of strategic uses and tactical functions.

TOP 5 BOND ETF PORTFOLIO APPLICATIONS

Total U.S. Europe
Passive exposure in the core 60% 53% 67%

Tactical adjustments 60% 60% 61%

Cash management 48% 45% 50%

Accessing new sectors/markets 44% 38% 50%

Portfolio completion 44% 45% 43%

Note: Based on 86 responses in 2017; 40 in the U.S. and 46 in Europe.

Source: Greenwich Associates 2017 Fixed-Income ETF Study

Institutions’ results with these investments to date are a positive indicator

for future ETF growth in the channel. Ninety-nine percent of study
participants that have invested in ETFs say they were satisfied with the
experience, including such factors as pricing, market impact and time to
execute, and 95% say they would trade ETFs again.

5   |   GREENWICH ASSOCIATES
ICR0718U-542482-1740912
Derivatives Users Consider
the ETF Alternative
Derivatives have become an important alternative for liquidity-starved
investors in both Europe and the United States. Forty-five percent of
European study participants and about 30% of U.S. institutions now use
derivatives such as credit default swaps, Treasury futures and total return
swaps to gain fixed-income exposure.

Seventy-seven percent of institutions in the study say they have or

would consider using bond ETFs as an alternative to gain fixed-income
77%
would or have
exposure. Supplementing or replacing existing derivatives positions, they
say, can help reduce associated trading and other ongoing costs, such as
considered using
contract funding and rolling costs. bond ETFs to
supplement or
Looking ahead, institutional investors—particularly those in Europe—fear replace derivative
that evolving regulations will make it even more difficult to employ positions
derivatives in their portfolios. If these concerns prove true, growing
Note: Based on 30 responses.
numbers of institutions are likely to turn to ETFs for benefits such Source: Greenwich Associates Fixed-
as lower costs, decreased operational complexity and less tracking Income ETF Study

difference versus underlying exposures.

Bond ETFs on Course

for Future Growth PLANS FOR USING BOND ETFs IN
NEXT 12 MONTHS: U.S. vs EUROPE
Internal investment guidelines and external regulations that limit or U.S.
prohibit the use of ETFs in institutional portfolios remain a challenge.
However, these rules and limits are gradually disappearing, as plan
sponsors and regulators watch institutional investors employ ETFs 31%

safely and to the benefit of their portfolios. This process has played out
well in the United States, where only a third of institutions say internal
investment guidelines limit ETF use, and just 13% say regulation is a 69%
hindrance.
Increase
As these limitations fall by the wayside, the path will be clear for Stay the same
Europe
Decrease
institutions to ramp up their usage of ETFs. Study participants plan to
do just that. One-third of current ETF investors interviewed plan to 9%
increase bond ETF allocations over the next 12 months, six times
more than the number planning reductions. U.S. institutions are especially 36%

bullish about expected ETF allocations, targeting increases of almost

30%. European institutions plan to boost ETF allocations a healthy 19%.
55%

Note: May not total 100% due to rounding. Based

on 39 responses in the U.S. and 45 in Europe.
Source: Greenwich Associates 2017 Fixed-Income
ETF Study

6   |   GREENWICH ASSOCIATES
ICR0718U-542482-1740912
BlackRock iShares is
Top Bond ETF Provider
iShares is the preferred bond ETF provider for the investors participating
in the Greenwich Associates study. Among institutions in both Europe and
the U.S., 79% name iShares as their fixed-income ETF provider of choice.
At 7%, Vanguard ranks a distant second.

Cover Photo: © iStockphoto/Oat_Phawat

The data reported in this document reflect solely the views reported to Greenwich Associates by the research participants.
Interviewees may be asked about their use of and demand for financial products and services and about investment practices
in relevant financial markets. Greenwich Associates compiles the data received, conducts statistical analysis and reviews for
presentation purposes in order to produce the final results. Unless otherwise indicated, any opinions or market observations
made are strictly our own.

© 2018 Greenwich Associates, LLC. Javelin Strategy & Research is a division of Greenwich Associates. All rights reserved. No
portion of these materials may be copied, reproduced, distributed or transmitted, electronically or otherwise, to external parties
or publicly without the permission of Greenwich Associates, LLC. Greenwich Associates,® Competitive Challenges,® Greenwich
Quality Index,® Greenwich ACCESS,™ Greenwich AIM™ and Greenwich Reports® are registered marks of Greenwich Associates,
LLC. Greenwich Associates may also have rights in certain other marks used in these materials.

greenwich.com  [email protected]  Ph +1 203.625.5038  Doc ID 18-2031

ICR0718U-542482-1740912
Reprinted with permission of Greenwich Associates, LLC, July, 2018. The opinions expressed in this reprint
are intended to provide insight or education and are not intended as individual investment advice. We do not
represent that this information is accurate and complete, and it should not be relied upon as such.

Carefully consider the iShares Funds’ investment objectives, risk factors, and charges and expenses before
investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary
prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus
carefully before investing.

Investing involves risk, including possible loss of principal.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding
decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal
and interest payments.

Investment comparisons are for illustrative purposes only. To better understand the similarities and differences
between investments, including investment objectives, risks, fees and expenses, it is important to read the
products’ prospectuses.

Transactions in shares of ETFs will result in brokerage commissions and will generate tax consequences. All
regulated investment companies are obliged to distribute portfolio gains to shareholders. Diversification and asset
allocation may not protect against market risk or loss of principal.

Shares of iShares ETFs may be bought and sold throughout the day on the exchange through any brokerage
account. Shares are not individually redeemable from the ETF, however, shares may be redeemed directly from an
ETF by Authorized Participants, in very large creation/redemption units. There can be no assurance that an active
trading market for shares of an ETF will develop or be maintained.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer
or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any
strategies discussed will be effective.

The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

This study was sponsored by BlackRock. BlackRock is not affiliated with Greenwich Associates, LLC, or any of their
affiliates.

iSHARES and BLACKROCK are registered trademarks of BlackRock. All other marks are the property of their
respective owners.

ICR0718U-542482-1740912