The universe of U.S. fixed-income products now includes over 700 ETFs with total assets approaching $2 trillion, according to ETF.com. So, advisors have no shortage of options when building out fixed-income allocations for clients.
Asset manager BlackRock alone accounts for a significant percentage of the overall market. It manages the largest fixed-income ETF, the iShares Core U.S. Aggregate Bond ETF (AGG) which by itself has nearly $120 billion in assets.
Overall, BlackRock’s iShares fixed-income ETFs now have over $1 trillion in AUM, up almost 40% since 2021. In 2024 alone, iShares raised $87.4 billion for its fixed-income ETFs, almost one-third of total fixed-income ETF fund flows of $263.5 billion. It’s the biggest year for fixed-income ETF fund flows ever, with nearly a month left to shatter the previous record of $213 billion in fund flows in 2021.
BlackRock also continues to seed its fixed-income portfolio with new funds. In late October, it announced an expansion to its iShares iBonds ETF franchise with four new one-to-five-year defined maturity bond ladder ETFs. The funds included a Treasury ladder ETF (LDRT), a TIPS ladder ETF (LDRI), a corporate ladder ETF (LDRC) and a high yield and income ladder ETF (LDRH).
The ETFs seek to track a BlackRock index that consists of an equal 20% allocation to five iShares iBonds ETFs in their respective asset classes spanning five consecutive termination years. Each index will be reconstituted and rebalanced annually by replacing the iShares iBonds ETF that terminates in the current year with one that terminates five years forward and assigning equal weights to each constituent.
WealthManagement.com sat down with Dhruv Nagrath, director and fixed-income product strategist at BlackRock, to discuss the outlook for fixed-income ETFs.
This interview has been edited for style, length and clarity.
WealthManagement.com: Let’s start with the big picture. The Fed has lowered its target rates by 75 basis points, with potentially more cuts to come. We have an incoming Trump administration. Inflation is still around 3%. What is the outlook for fixed income amid all of this?
Dhruv Nagrath: There’s still a ripe opportunity to put money to work in fixed income. That’s the biggest overarching message we are sharing with clients as we speak with wealth managers around the country.
You have to put the current moment into context. A few years ago, we had investors who needed income in their portfolios and reached out to risky parts of the market to get a decent level of income. There was a time when you had to buy high-yield or emerging-market debt to get 4% yields. Now, you can get that at the short end of the yield curve.
Today, there’s still plenty of money to be made, but there is some shifting sand in the landscape. The first and most important point is that the U.S. economy remains very strong. It’s been supported by consumption, a strong labor market and solid investment capital expenditures. Looking back further, there was a strong post-pandemic stimulus and excess savings.
That has powered us through 10 consecutive quarters of growth. It’s an interesting perspective when you think back to the start of last year, people were predicting an imminent recession. Instead, we just got through the third quarter with GDP annualized growth running at 3.7%. The Atlanta Fed is projecting a 2.6% pace for the fourth quarter.
We think the 2025 story is going to continue to be positive, although growth may moderate a bit. There are a bunch of forecasts in the low 1% to mid-2% range. We land somewhere in the 1.5% real GDP growth range for next year.
With the Federal Reserve, Chairman [Jerome] Powell has pulled off two sets of cuts and reduced the target range by 75 basis points. The reason for those cuts was calibration. There is recognition that the Fed has made progress in bringing down inflation. Core CPI is down to 3.3%, which is half of where it was two years ago. There’s not as much of a need to maintain a restrictive rate setting. The Fed doesn’t need to keep both feet on the brake pedal.
In terms of the election and how that changes the dynamic, we don’t have full clarity yet. Policy is being shaped on the go. As much as markets like to react quickly, there are still a lot of announcements that need to be made. Scott Bessent as the Treasury Secretary is a market-friendly appointment. But, there have also been announcements about potential tariffs that sent the market gyrating. There’s a general acceptance that tariff plans could be inflationary. On the flip side, deregulation could be supported. It’s not fully clear yet, and it will take some time.
WM.com: I was wondering if Trump’s election in and of itself led to any movements in bond yields, given what he’s said about presidents being more involved in setting rate policy or making a move to try and replace Powell before his term is up, as well as what you mentioned.
DN: We know Jay Powell was appointed by President Trump, and at some point, he fell out of favor with Trump. It’s hard to know how that’s going to play out. Central banks are going to do their best to be independent. Jay Powell has been firm about that.
In terms of yield curves, we must be guided by the data. The progress that has been made in terms of getting inflation down has been a driving factor. In the past few Fed meetings, the focus has shifted from controlling inflation to supporting growth. The cuts that have been done were cognizant of employment weakening a bit.
WM: So, how does this backdrop inform fixed-income investment strategies?
DN: There is abundant opportunity at the short end of the curve. You don’t have to reach into risky sectors to get a good core return in your fixed income allocation. But we have recognized some degree of inertia with clients. They have been shy about adding duration to portfolios. If you look at the money market, it’s at a record balance of $6.5 trillion. That has not abated.
Since last summer, we have been talking about adding duration at the intermediate part of the yield curve—the three-to-seven-year timeframe. The five-year point is a sweet spot. That’s where we’re taking our duration. You get a healthy risk/reward balance, and we’re choosing not to use 10-year to add duration. That is a greater degree of volatility given you’re not getting much term premium and there’s a lot of uncertainty around deficits long term. Going to that duration introduces volatility that you are not being compensated for.
Funnily enough, however, where we see money has been going is a bit more of a barbell. There’s a lot of flows into SGOV (iShares 0-3 Month Treasury Bond ETF) and a lot into TLT (iShares 20+ Year Treasury Bond ETF). The net flows into SGOV and TLT from when the Fed’s hiking cycle ended in July 2023 up to now have been $15.9 billion and $19.3 billion, respectively.
WM.com: What do you attribute that to? Why are the flows barbelled at the extreme ends of the yield curve?
DN: There are a multitude of buyers out there. And one of the big trends is the rise of model portfolio managers. They get that ETF are precision tools and liquidity instruments. They could have a big model portfolio that wants to add some long duration. TLT is an efficient way of doing that. We also saw a wirehouse-managed model portfolio that made a significant trade into TLT as part of making a bet on recession risk. It’s an efficient vehicle for doing that.
Similarly, there’s always a lot of money at the short end. SGOV is a strategy that in 2020 didn’t exist that’s now a $25 billion fund. For some investors out there, it’s a good way to hold short-duration if you want a liquidity sleeve in your fund.
I’m not saying ETF investors are this monolith making this barbell trade, but in aggregate, this is where that money has gone as part of ETFs being used as part of their precision toolkit. More and more of these models are using ETFs in their process, so that’s why you have these big flows and shifts.
WM.com: On that thread of duration, the evolution of fixed-income ETFs means that you can find specific products for target durations or look at fixed-income ETFs that are a blend of strategies, correct? Is this where BlackRock’s ladder ETFs fit into the mix?
DN: You can have exposures that do it all for you. But at the same time, you can disaggregate into their component parts if you want.
For broad exposure, you can buy something like AGG (iShares Core U.S. Aggregate Bond ETF), which is one of our most successful bond market ETFs. It’s got a 3 basis point management fee. But then there are clients who get a lot more precise. Say they want to shorten duration, they can buy ETFs at specific parts of the yield curve.
One of the most notable segments in our product set, especially in the wealth landscape, is our iBonds term maturity ETFs. That’s a result of some clients saying, “We still want it to mature like an individual bond.” We created the structure in 2010. Now we have $33 billion in assets in those products. Over the past three years, the product set has tripled.
What it is are portfolios with bonds that mature in set calendar years. The name of the game is building bond ladders. In the past, you would build those out with individual bonds. Now you can do it with tickers. You can do it across Treasuries, TIPS or corporate bonds.
That’s been one way clients have been putting money to work and lock in yields across the curve. We also have built a tool where advisors can visualize the opportunity set using these ETFs.
WM.com: Another big trend in the space is the continued rise of actively-managed ETFs. A majority of new ETF launches across all strategies are now active ETFs, even if passive still accounts for a majority of AUM. What are some of the trends for active fixed-income ETFs?
DN: We’ve been using active fixed-income strategies for over a decade. There’s nothing new about it, but the big shift started with changes to the ETF rules in 2019, which made it easier for others to come to market with active strategies within ETF wrappers.
As an investor, you are in the pole position to do whatever you want. You can continue to use low-cost, efficient index exposures. That’s never going to stop, and that’s the core of the ETF market. But then you have this other spectrum where you can layer on top of that.
There are pure index ETFs. Then, there are systematic ones, which are rules-based indexes for portfolio management. Some additional screens are involved in trying to drive an outcome. Then there is full-on discretionary, active management. We’ve done some new launches there as well.
Ones I would love to call out are run by our CIO, Rick Rieder. These are funds that I’m very excited about and they give clients access to certain areas of the market that even if they have had the instruments to access, sometimes they didn’t want to. One of our biggest successes is BINC (iShares Flexible Income Active ETF). It’s designed to play in harder-to-reach fixed-income sectors. So many advisors have told me they would be happy to take a view—but don’t have the bandwidth to do it well—are things like hard currencies or high-yield European or securitized bonds.
Outsourcing that decision-making is one reason why BINC has grown to $6.4 billion in assets in less than two years. It’s delivering yields close to high-yield BBs bonds with 25% less risk. It’s doing well so far. And clients have taken to it. It’s solving for a client need with the efficiency of the ETF wrapper with the expertise of Blackrock’s active fixed income team.