Episode Transcript
Marina Mets: Hi, welcome to FTSE Russell Convenes. I'm Marina Mets and I head up the FTSE Russell's Fixed Income Business in the Americas. I'm so pleased to be joined today by Joyce Choi who runs the Institutional Strategy Effort for BlackRock's Fixed Income ETF Business. Thank you for joining me today, Joyce, and welcome.
Joyce Choi: Thank you very much for having me.
Marina Mets: So, let's talk about the markets then, since you've observed them, let's see where we are.
So, look, fixed income has obviously gone through an incredible renaissance. It's a huge topic of many, many conversations now, passion of mine for most of my career. One of the big themes that I've been watching and is going through the markets right now is this landscape of modernisation and what that’s meant in fixed income. We talk about things like electronification. We talk about things like equification. And, of course, ETFs. And you've had a front row seat in this, because ETFs have played an integral part in pushing this kind of innovation through the markets. What does that mean in practicality? What do these terms mean in terms of how fixed income is being transacted, and what does that mean for investors looking at fixed income as an asset class?
Joyce Choi: You're right, and I love your use of renaissance because we certainly are at a very interesting and pivotal moment for fixed income markets. And I would say that there's been a number of drivers similar to what you just mentioned, whether it's regards to the technology put in place today, incredibly high speed algos that are being implemented across the street, whether from a market maker lens or a broker dealer lens to clients as well, to protocols, electronic platforms, really creating a lot of ease and transparency with regards to how you would actually transact or execute.
Of course, processes with the increased trading, with the transparency, at least in the US with trace data. All this data are inputs that can help one make better judgments and better investment decisions. And historically has not been an area of strength within the fixed income markets.
And then last, but certainly not least, it's product innovation. You mentioned ETFs, and I'm glad to be here to speak on where we are with the ETF market, but we do certainly think the ETF underpinned a lot of the advancements that we've seen over the past few years for different reasons, whether it's the primary market mechanism through the creation of redemption process, through the transparency of the close of day index prices. But at the end of the day, what does this mean for investors? It just gives them more tools, gives them additional flexibility to build portfolios with a wider number of strategies that really didn't even exist a few years ago.
So what we're trying to achieve, you mentioned the word equitification, to create less of a friction market to transact and create opportunities for investors to think about risk transfer, via not just the single name market, but through the idea of a portfolio of bonds, through an ETF, and the beta concept that the ETF does provide.
And so what it's really been able to create in terms of how I look at the street today, and how I look at the market structure today, is that it just creates more fungibility across various vehicles whereby, now investors can consider CDX indices, total return swaps, the ETF, of course, portfolio trading, single name bonds, and all the derivatives that are now linked and tethered to the ETFs in one fungible manner, which again makes it much easier for dealers to hedge their risk, but also then makes easier for the investor to really be able to assess different opportunities and understand that the execution is going to be a lot more seamless than it used to be.
Marina Mets: We've been watching this as well. This idea, I think, that execution can be seamless, to me, creates trust in the system. Trust creates more ability, more access, more transactability, which then builds kind of more demand. But let's pick on what you've just mentioned, which is that all of these things are creating tools in a toolkit, right? And investors have a ton of choice today. How are investors actually optimising these tools in order to be able to think about portfolio construction and investment at large, especially in accessing a market like fixed income?
Joyce Choi: Again, ETFs, as the area that I focus on, I've seen incredible amounts of growth in this space, and it's been predominantly driven by institutional investors. Over the past decade, we've seen over tenfold growth in fixed income ETF assets versus twenty percent growth in the underlying cash markets. So why is this? You know, I would say that 2020 was another pivotal moment for fixed income ETFs in the sense that volatility creates opportunity.
And in this instance, as most of us experienced and lived through, to be able to transact and trade risk in the March, April 2020 period was incredibly difficult. And what happened was, because the ETFs were one of the few venues in which you could trade and transact in size, the markets flocked to that. So we saw a number of our ETFs, for instance, quadruple or even quintuple in trading volumes over that period from 2019 volumes. And that includes our high yield, investment grade, and treasury ETFs. So what does that mean for investors?
We did see over sixty new institutional investors enter into the fixed income ETF market for the first time during that period, simply for the fact that it was incredibly difficult to transact otherwise.
So where did we see it? Tactical, certainly. A lot of investors thought either the sell-off was too profound or maybe that the rise in the rebound in asset prices was too fast. So we saw a lot of tactical trading in the ETF.
We saw a lot of liquidity usage. So again, for a lot of investors that need to manage a liquidity sleeve in their portfolio, and this is even more relevant for fixed income investors, simply in the fact that it takes so long to build an entire fixed income portfolio given the traditional over-the-counter nature, wider bid offers, et cetera.
So to be able to manage liquidity, or manage liquidity around a portfolio by buying and selling the ETF on the margin to again, help you access more efficiency in terms of how you manage portfolios.
And then thirdly, strategic usage. So again, this is certainly relevant for a number of investors that may have less analysts and portfolio specialists to cover a certain asset class. To be able to access that index risk in emerging markets or high yield is incredibly more efficient than having to hire ten, fifteen new credit analysts to cover an asset class that again, you may be less familiar with at the moment.
Marina Mets: That definitely seems like where the market's been going, right? So this ability, I mean, and I agree with you, right? COVID, I think, was the testament to the resiliency of ETFs and the fact that the market can and does function through stress.
What I think has been interesting from our seat as we've been watching this kind of market evolve is the different toolkits and the different use cases open up for other use cases. And they certainly create a lot more data in the system, a lot more transparency in the system.
And where we've seen that demand go is towards kind of precision instruments. And I think we're starting to see that permeate back into the ETF market. What are the largest ETFs out there by size? These are your standard kind of issue, large market cap, beta, big products. And there's place and growth in those.
But what is also I think super interesting is when you look at what is being issued in the market today, what's being brought to investors as an option, are really much more tactical precision tools. So it's break-up across the term. It's, you know, looking to achieve structural kind of liquidity within particular parts of the fixed income market. Or, as you mentioned, accessibility, kind of new asset classes or evolving asset classes that are now coming into or maturing to be able to come into that ETF wrapper umbrella.
Are you guys watching the same? And what do you think about, kind of, how that's evolving and changing?
Joyce Choi: Well, you said it earlier, the fact that more data and more transparency creates trust. So while we saw a number of first time users in 2020 of fixed income ETFs, now what we're seeing is that those investors have become quite comfortable with using ETFs in their portfolios.
So now they say, what's next? How can we embrace this more? How can we deepen our usage? So you're completely right. Whether you're talking about a new asset class that they step into via an ETF, or even be able to play some of the other aspects of the ETF ecosystem through the options market or the futures, it really does speak to the ETF or its tangential products creating, or filling that need that again, most investors didn't even know that they needed a few years ago.
So with regards to products, certainly no shortage of product innovation in the past few years in the fixed income ETF markets. But one that's been incredibly timely is this concept of Triple A CLOs. Now, this type of exposure did not even exist in an ETF format five years ago.
And so we happen to be in a very prime time for Triple A CLOs in the sense that they are floating right in nature and in this higher-for-longer environment, you know a lot of investors would like, are preferring that type of exposure.
And then you also have the Triple A, you're at the highest tranche of the credit curve and very attractive yields at about seven percent. So just to see the type of growth that we've seen in the assets under management for these type of exposures has been the fastest growing area within the fixed income ETF space this year.
I think this just underscores the fact that investors aren't even aware of what they may need, but they see it as an available option or vehicle, and they certainly take advantage of it when the market opportunity calls for it.
So that's one example. And there are certainly others with regards to using options on an ETF to help manage portfolio risk or generate income. So we have launched a few buy-write ETFs that are linked to the high yield investment grade and treasury markets.
And so this allows investors that are focused on income to be able to generate that options premium every month while still being, you know, again, involved and invested in that particular asset class. So product innovation is certainly moving at a very, very fast pace with options embedded strategies, or again, new asset classes that were previously, honestly not able to be put into an ETF. So, the markets are changing and we're certainly riding that wave.
Marina Mets: You know, and as a way, right, like we also watch the, you know, the market flow, if you will, the market demand and facilitating that through construction. I think the ecosystem point is super interesting and super critical because you see the evolution of that ecosystem. So, you know, you talk about ETFs, then you've got futures, then you've got options, then you've got options on the ETFs, right? And so it creates this idea of flowing capital through the system, allowing investors at all different echelons to hedge risk, to transfer risk, to transact, and I think builds more and more interest in the market. So we've been watching that with kind of keen interest.
But you mentioned this idea that sometimes products come investors didn't even know they wanted, right, which is the best kind of demand. What should investors be thinking about or what questions should investors be asking that they're not today, to think about that next kind of component, if you will?
Joyce Choi: Sure. Well, within the ETF space, because there has been a number of new products and number of new issuers that have come to the market, I think it is very critical, as it is any time, to understand what you own. So please understand what you're buying, because as the number of product grows, the products are getting nichier. So it might be just a very fine slice of the market, or it could be very broad or anything in between.
So I think understanding what you own, understanding how the ETF performs relative to its benchmark, if there is one. Certainly management fees are a consideration. It's becoming increasingly price competitive, but nonetheless something that investors should be monitoring and looking out for.
Again, I mentioned floating rate exposures. This certainly does well on a higher-for-longer. But perhaps if we're in a rate cutting cycle, this may be an exposure, you may, maybe allocate more towards fixed rates than floaters. So understanding the implications of that exposure on your portfolio.
Marina Mets: One of the taglines for FTSE Russell Indices is “Know what you own.” And that's part of indexing, right? It's the transparency, it's the construction of the underlying and understanding the risk return performance and behaviour of the assets that are underpinning the benchmark or sitting within the ETF. And it’s certainly been a big innovation for the market in general and for the investment in those markets. So maybe just to kind of end us off, what are you most excited about as you look out from an investment perspective over the next six to twelve months?
Joyce Choi: You know, one of the reasons that I entered into the ETF space was really the idea of democratising investment to everyone really appealed to me.
There are many of those that aren't able to save as much or they don't have access to certain investment vehicles or asset classes in which to invest to create those savings. So as I have attended a number of your conferences lately, I'm hearing a lot more interest about creating more ETFs in expanded asset classes. So that continues to accelerate. But more so in this realm of, you know, privates or alternatives. Now, I hope that they're all done in a conservative manner and judiciously, but nonetheless, I love the idea of common investors being able to access asset classes that were previously unachievable or unaccessible in the past. Again, creating a little bit more wealth for the population.
Marina Mets: I love that. And I see this altruistic theme running through it. Joyce, thank you so much for joining me today. This was such a fun chat. And I look forward to talking to you more.
Joyce Choi: Thank you, Marina, for having me.
