(Bloomberg) — Exchange-traded funds can be the source of liquidity that retail investors need after ramping up exposure to private assets, BlackRock Inc. executives wrote in a report.
The lack of daily liquidity in private funds, which typically only allow redemptions at specific intervals, as well as their slow repricing boosts the need for something that can be quickly bought or sold during challenging times, the report argues. With private credit allocations growing among wealthy clients, bond ETFs can be a “liquid ballast,” they said.
“As portfolios incorporate greater private exposures, maintaining sufficient liquidity becomes increasingly critical at the overall portfolio level,” said Vasiliki Pachatouridi, EMEA head of the firm’s iShares Fixed Income Product Strategy, one of the paper’s authors.
“That’s where we think bond ETFs can be increasingly used as a source of liquidity and flexibility, particularly during periods of market stress and volatility,” she said in an interview.
The report comes as the private credit industry has been hit by a wave of redemption requests from retail investors, who are fearful of artificial intelligence’s impact on the software firms the funds are invested in. Outflows have been so strong that several private credit funds have had to cap redemptions, leaving billions of dollars trapped.
Trading in fixed income ETFs has ballooned, more than tripling since 2020 to $67 billion daily year-to-date, according to BlackRock. Volumes generally spike during periods of market stress, hitting $84 billion last month during the Iran War, its report said.
“When public assets reprice more quickly than private valuations, portfolio weights shift, and they can shift quite materially,” Pachatouridi said.
In recent weeks, bond managers including Pacific Investment Management Co. and Janus Henderson Group Plc said retail investors who previously gravitated to private credit have become receptive to their pitch of similar returns with daily liquidity.
Read more: Private Credit’s Rude Awakening Gives Bond Funds a New Edge
BlackRock flagged the rise in global bond ETF assets, which have more than doubled since 2020 to about $3.5 trillion. Meanwhile, actively-managed fixed income ETFs drew 32% of global fixed-income ETF flows last year, even through they account for a fifth of the market.
