For many of us, the name stock market denotes a complex process of trading stocks and bonds. That complexity itself discouraged many individuals from entering the market.
But that has changed after the arrival of the ETF. The ETF has modernized and simplified the complex operations and environment of the stock market into an efficient and transparent one. It has also diversified the portfolios.
It has changed how investors build their fixed-income portfolios. In turn, it provides broad or targeted access to the fixed income market.
Bonds are an important part when it comes to diversifying your investment portfolio.
But when it comes down to it, fixed-income investing is a time-consuming one, where an investor should research deeply, with due diligence, and trade many individual bonds.
This complexity deters many fresh aspirants from entering the market or turning to costly actively managed strategies. But in the case of bond ETF, there is not much complexity as it exposes numerous individual bonds within a single trade.
These bond ETFs track the index and avoid high fees of actively managed strategies, making it relatively inexpensive and leaving investors with more yield. They can use active managers to use both different alpha and bond ETFs together.
But liquidity in the bond market has not been easy since the 2008 financial crisis because banks’ higher capital requirements make it more expensive for them to hold the large inventories of the bonds required to act as market makers.
The 2020 pandemic heightened it.
This made bonds lose their trust among the institutional traders, especially when it became difficult to source new bonds. They all prefer started to the alternative, bond ETF.
It offers ease and transparency during the trade; it has quick market exposures and is better in liquidation than ordinary bonds.
Since its release in 2002, bond ETF gained traction from 2010 onwards. This increased demand led to an increase in its size and number of bond ETFs, eventually reaching $1tn in assets in the US market.
But it has not yet reached the ceiling as it only accounts for 1.5% of the US bond market.
Another attractive feature of it is that it provides stability during unstable times. Its diversification can offset losses in other asset classes, thus helping the investor ride out the market volatility.
This was seen during the 2008 crisis and in the 2020 pandemic.
With good active managers, they are a relatively efficient, liquid, and transparent way to diversify the portfolio and access the fixed-income market.
As of now, it is helping many investors to build long-term objectives and also to ride out short-term volatilities.
In India, numerous government organizations and public sector corporations have released Bharat Bond ETF. That will enrich the Indian ETF market, where the favorite ETF is gold. Between the two the silver will also arrive, diversifying it more.