Fixed income ETFs is a market that is both large and still in its early stages of growth, according to Dhruv Nagrath from BlackRock, which recently reached a record $12.5 trillion AUM.
“It’s a market that is in rapid growth phase,” Nagrath, director of the firm’s iShares Fixed Income Strategy team says. “It’s already a big market, a couple of trillion dollars globally… but it’s just scratching the surface when you think about the overall scale of the global fixed income markets.”
In an interview with InvestmentNews, he adds that despite volatility in recent years since 2020, the growth trend has been consistent.
“The impact of the rate hike shock and everything through those past five calendar years that we've experienced, we've seen $200 billion a year go into the fixed income ETF industry,” he says, adding that 2024 was a record year with approximately $280 billion and 2025 is looking like another banner year.
Nagrath is quick to point out that the shift in interest from mutual funds to ETFs isn’t limited to younger investors.
“It’s funny,” he says. “I do think that there are younger investors who have adopted ETFs writ large in a bigger way… but actually, surprisingly, it’s across the wealth, the advisor universe. It’s those young people and their parents, their advisors who are actually driving flows into ETFs.”
He stresses that the move is not “a wholesale rejection of mutual funds,” but “an adoption and embrace of ETFs. If I had to boil it down to three punchlines or ideas, I’d call it efficiency, access, and outcomes.”
Among the attractive aspects of ETFs, Nagrath highlights their tax efficiency and cost effectiveness which make these funds the wrapper of choice for anyone building a portfolio.
Nagrath emphasizes the importance of indexing as the foundation of fixed income ETF adoption.
“As much as there’s been a huge uptake of active ETFs, at the core of all of it is really efficient indexing,” he says. “There are many investors out there who are using indexes as their very efficient core. And that’s where the bulk of those assets are, the two and a half trillion dollars in assets.”
“Take AGG, our biggest fixed income ETF. It’s a $128 billion fund. It has 12,000 line items. It charges a fee of three basis points per annum, and it tracks its benchmark within basis points. It’s a beautiful thing. I love to geek out on it,” he admits.
At the same time, Nagrath points to the growing popularity of active strategies.
“You have the ultimate choice in terms of having a really efficient core of your portfolio and then adding value around that,” he explains. He cites BINC, BlackRock’s flexible income ETF run by CIO Rick Rieder, as a standout success. “It’s gone to $10.5 billion in assets in the space of two years. We did have a cake to celebrate it… it’s a great success story of bringing this fantastic strategy to an efficient wrapper.”
Another example is CLOA, which provides access to AAA-rated collateralized loan obligations.
“CLOs at the AAA segment have never had a default,” Nagrath notes. “It’s a really high-quality asset that’s getting you a yield of 5.8%. And because they have floating rates, you don’t have any volatility associated with interest rates.” CLOA, he adds, recently crossed the $1 billion mark: “There was no cake. I would have liked some cake.”
For Nagrath, the themes of choice and democratization are central to the fast-growing popularity of fixed income ETFs.
“Whole new classes of investors in the retail space are able to access markets that historically were not so easy to index or… access generally…access to things that previously only institutional investors had,” he says, noting that the access is supported by the rise of model-based portfolio management.
“According to Cerulli, it’s about a $4.2 trillion industry right now, and they’re predicting it’ll get to over 11 trillion in the next 10 years,” Nagrath says. “The rise of that goes hand in hand with the rise of ETFs.”
As another example of innovation, Nagrath points to iBonds, term-maturity ETFs that combine diversification with the familiar maturity profile of individual bonds.
“Basically, these are just bond ETFs that mature on set calendar year schedules,” he explains. “It makes it a lot easier for people to buy bundles of bonds… whether you’re saving for a child’s education or a holiday home.”
The growth of these products has been substantial.
“At the end of 2021, iBonds were a $10 billion product suite,” Nagrath says. “They are now a $35 billion product suite. They’ve more than tripled in the past few years.”
He also highlights a newer development, money market fund ETFs.
“Maybe it’s not as sexy as some of the other active parts of the market, but it’s remarkable,” he says. “Look, there’s $7 trillion sitting in cash. And I think there are a lot of investors out there who don’t know what fees they’re paying on their cash sweeps. Having money market fund ETFs now is just another great tool in the toolkit.”
“We see the bond ETF industry becoming a $6 trillion industry by 2030,” Nagrath says. “We’re quite bullish on the prospects.”
But despite the optimistic outlook, he urges advisors to be discerning.
“Just putting something in an ETF wrapper is not a guarantee of success,” he cautions. “Really do your due diligence on who is the manager that’s bringing this strategy to market. Do they have the scale? Do they have the operational platform? Can they handle huge volumes coming into the ETF and going out?”
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