Fixed income has been the story of the year so far in the exchange-traded product industry, and ETP titan iShares believes that will continue in the coming years.

“If we take the $1.6 trillion that is invested in ETPs, only about 18 per cent is in fixed income assets, but fixed income markets are larger by capitalization than the equity markets,” David Bower, managing director at iShare’s, told this publication.

“We see fixed income as the growth area for the next three to five years, across sovereign and credit including investment and sub-investment grade, and across regions, both developed and emerging markets,” Bower said in an interview.

Without being specific, Bower suggested that fixed income ETFs could become bigger than equity ETFs over that time horizon. Developed market equity ETFs make up 56 per cent of the total market and emerging markets nearly 13 per cent, according to the latest figures.

In May, fixed income ETPs recorded its second record month for the year with inflows of $11 billion, compared with $9.1 billion for the previous record set in January, the latest ETP report from iShares showed. Meanwhile, total assets under management in the industry fell from $1.716 trillion to $1.619 trillion.

“We are very optimistic that the ETF market overall can continue to grow,” Bower said. “We don’t believe that a difficult market continues in perpetuity.”

“If we look at the period post September 2008, when markets were very volatile, we had record inflows into ETFs,” he said. “When markets rallied following the March 2009 lows, we saw strong inflows again. So regardless of direction of markets, we are seeing continuing increases in the use of ETFs within clients’ portfolios.

“When we have asked investors about their plans for ETFs, both on a one-year and a three-year basis, we see the majority declaring that they will be increasing their use of exchange-traded products to implement their asset allocation decisions,” he said. “A number are saying that their use will remain the same and only a couple of per cent say that they will be decreasing.”

An asset class for sophisticated investors?

ETFs make up a fast-growing asset class which has only been around for 20 years, and for even less time in Europe. However, last year the so-called index-trackers found themselves hitting the headlines for the wrong reasons, when regulators on both sides of the Atlantic looked into the asset class.

“We had a lot of calls to the iShares hotline in 2011 concerning the interest regulators were expressing in ETFs,” Bower said. “The quality of existing ETF regulation means these are easily handled, but we take the approach that we are constantly striving to improve the category.”

Many commentators believe, however, that ETFs are only suitable for sophisticated investors and not retail investors. “The most important advice I can give is to know the index,” Bower said. “It is the index being tracked that is going to give you the market risk and returns of an asset class. Indices with very similar sounding names can give very different exposure depending on the index providers’ rules. The majority of us need professional financial advice and we have always directed our resources to support the professional investor.”

Bower believes that ETFs can allow investment advisors of private clients to spend less time on portfolio construction and instead focus on building relationships: “If advisors are spending their time running the financial plans of their client, managing their tax positions and the asset allocations, then using ETFs allows them to free up time to concentrate on relationship management.”

iShares is part of BlackRock, the world’s largest asset manager, and has a 40 per cent stake of the global ETF market. However, the rapid growth of the market has led to increased competition as more players enter the space. “We are not surprised by the competitive landscape,” Bower said. “New competitors underscore our belief that ETFs will grow considerably from where we are today.”