While individual investors lose interest in fixed-income assets, the BlackRock’s iShares line of bond exchange traded funds are gaining in popularity amongst banks that require a liquid alternative to individual debt securities in light of new regulatory rules.
“We are seeing more and more plans now coming to BlackRock and saying we can’t live with the trading costs of our fixed-income portfolio, we can’t live with the lack of liquidity we have in our fixed-income portfolios and we can’t live with the operational task of managing thousands of securities,” BlackRock’s Chief Executive Officer Larry Fink said in a Bloomberg report.
Specifically, Fink pointed to the lower bid-ask spreads on trades associated with the iShares fixed-income ETFs as one of many cost saving attributes the investment tools offer.
The bid-ask spread is the price between what banks are willing to pay to purchase a bond and what they’ll be able to sell it for. The spread widens when bonds are riskier or harder to trade, which would increase the trading costs and potentially reduce returns.
Higher trading costs means “a change for everyone,” Fink added. “We’re in a better position for that through ETFs.”
Banks have been diminishing their exposure to fixed-income assets after global regulators required the firms to back a larger portion of bond assets with equities. Consequently, the lower demand caused some trades on debt securities to become slower and more expensive.
For more information on the ETF industry, visit our current affairs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.