iShares, the exchange-traded fund (ETF) arm of Barclays Global Investors, expects to see assets in fixed-income ETFs grow by over 200 per cent in the next three years, surpassing US$200 billion (£100 billion), as investment banks start trading the products more widely.

Globally, fixed-interest ETFs have over $60 billion in assets under management, a 7.5 per cent share of the total ETF market. Assets in fixed-interest ETFs have grown 230 per cent from $18 billion in June 2005 to over $60 billion as at the end of January 2008. ETF assets across all asset classes are expected to balloon from $800 billion currently to in excess of $2 trillion by 2011.

Alex Claringbull, fixed-income portfolio manager at iShares, says, ‘ETFs have traditionally been thought of as equity products, and the majority of the effort in developing and promoting ETFs has been in relation to equities. However, fixed-income ETFs are gaining acceptance among investors as they become educated about the convenience and transparency of them. We are also seeing ETF providers placing increased emphasis on creating innovative fixed-income ETFs, such as the new iShares USD Emerging Markets Bond Fund.

‘The fixed-income ETF market is still in its infancy, and the majority of fixed-income investors still trade with the large fixed-income capital market banks. However, as the size of the ETF market grows, banks will start bringing fixed-income ETFs to the attention of clients, which will have a major effect on the growth of the market generally, and fixed-income ETFs specifically.’

According to Claringbull, many banks have not really defined the best way to trade fixed-interest ETFs; they’re not sure whether they should be traded on equity trading desks, or whether they should be traded by fixed interest houses.

He says, ‘The solution is likely to be twofold, with bond houses helping equity desks to source underlying liquidity in ETFs and equity desks actively trading the liquidity. As this occurs, we’re likely to see more banks look to leverage the liquidity and transparency that ETFs provide investors, and consequently invest more extensively in fixed-interest ETF products.’