Worried Index-Based Strategies are Distorting the Bond Market? The Data Says You Shouldn’t Be

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This post was written with contributions from Emily Theurer. Emily is a Research Analyst in the SPDR Americas Research Team.

In my role as the head of Research for SPDR® Americas, I am often asked to debunk myths about ETFs and their influence on the market. Fixed income ETFs had a record month of inflows this June, and an old myth has resurfaced that index-based investment strategies—both mutual funds and ETFs—had an outsized impact on the fixed income market, distorting bond prices and producing a passive bubble.

Let me be clear: this myth is simply not true. But saying that and debunking it are two different things. So in this blog, I am taking a deep data dive, using facts and figures to explain why global fixed income funds—and ETFs in particular—are not distorting the bond market.

Putting the size of the global fixed income ETF market in perspective

Flows into global fixed income ETFs have increased every year over the past five years, totaling a cumulative $597 billion throughout that period.1 But fund flows are not just an ETF story. Index-based strategies, both global mutual funds and ETFs, account for $1.7 trillion in assets under management (AUM), up from $247 billion in 2007.2 Meanwhile, the actively managed global mutual fund and ETF marketplace has jumped from $3.6 trillion in 2007 to $6.9 trillion.3 Global ETFs now represent 33% of the total $1.7 trillion of index-based fixed income market.4

These numbers, while significant, pale in comparison to the overall size of the entire fixed income market. Even with sizeable inflows over the past few years, index-based assets equate to only 2% to 3% of the overall global bond market.

Good index-based data in, good index-based data out

How did I arrive at the 2-3% figure above? Well, there are two ways to measure the global bond market.

First, you can use the Bank of International Settlements (“BIS”) data, which captures all debt securities issued by residents in all markets. BIS figures, displayed in the below chart, show the index-based share of the global bond market is just below 2%.5

Source: State Street Global Advisors, Morningstar, Bank of International Settlements, as of 12/31/2018.

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