At The Money: How Fixed-Income Investors can use ETFs to their Best Advantage (June 11, 2026)
Investors seeking yield were once required to purchase individual bonds or mutual funds. Today, investors can purchase low-cost bond ETFs in just about any flavor you can imagine.
Full transcript below.
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About this week’s guest:
Steve Laipply is managing director at BlackRock and Global Head of iShares fixed income ETFs. Previously, he was the head of iShares fixed income strategy. He helps oversee more than a trillion dollars in fixed income assets.
For more info, see:
Personal Bio
Masters in Business
Transcript
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TRANSCRIPT:
Barry Ritholtz with Stephen Laipply, Managing Director and Global Head of iShares Fixed Income ETFs, BlackRock
Barry Ritholtz: Investors who are looking for yield were once required to purchase individual bonds or mutual funds. Today, ETFs have changed the fixed income market just as surely as they’ve changed the equity markets. Investors can purchase low-cost bond ETFs in just about any flavor you can imagine.
I’m Barry Ritholtz, and on today’s edition of At the Money, we’re going to explain how fixed income investors can use ETFs to their best advantage. To help us unpack all of this and what it means for your portfolio, let’s bring in Stephen Laipply. He’s Managing Director at BlackRock and Global Head of iShares Fixed Income ETFs. Previously, he was Head of iShares Fixed Income Strategy. He helps to oversee more than a trillion dollars in fixed income assets.
So Steve, let’s just start simply: Why ETFs? What are the advantages over bond separately managed accounts or mutual funds?
Stephen Laipply: Good to see you, Barry. Thanks for having me. This has been a bit of a journey that spans decades, actually. To really understand the power of bond ETFs, you have to go back before they existed.
So let’s call that the late nineties. The very first bond ETF came out in Canada in the year 2000, and then in the US in 2002. But if you go back to the nineties, buying bonds was a non-trivial exercise. It was very much a voice-driven market: You pick up the phone, you call several people, you get several quotes, hoping the market’s not moving on you at the same time, not quite sure if you exactly got the best price. There was very little transparency, and kind of uneven access — depending on who you were and what kind of wallet you had, you might get different treatment. That was a problem for some investors, not for all. Investors who had access maybe viewed that as an advantage, but for a lot of us, it was really challenging to build a high-quality, diversified bond portfolio.
So what did bond ETFs do? They opened that whole world up to transparency. You now had not even a single bond, but a portfolio of bonds that trades on exchange. You know what’s in it. You can see the price on exchange every second, ticking by. You don’t have to pick up the phone and call people — you can simply trade on exchange, and you know you’re getting the best price that’s quoted on exchange. Now, again, like anything, you have to use proper discipline when executing orders. But it was just a shocking, revolutionary thing to be able to trade bonds on an exchange.
Barry Ritholtz: That makes a lot of sense. I remember when this market was very dealer-driven, but there was always an option — at least over the past, let’s call it 40 years — of bond mutual funds. There are obvious advantages for equity ETFs over equity mutual funds. How does that translate to fixed income ETFs? What are their advantages over fixed income mutual funds?
Stephen Laipply: Well, there are a couple. Mutual funds still play a role — you’ll tend to see them in 401(k)s and things like that; that’s more of an architecture thing. But away from that, mutual funds price one time a day, at the end of the day, right? So you don’t know in the middle of the day what the valuation really is. I think a lot of advisors and investors have found the idea of being able to trade intraday at a known price really attractive. Because as you can imagine, Barry, let’s just say you get a strong inflation number or an employment report or what have you, and you want to move on that. You could put in an order for your mutual fund, and sure, that’ll get filled at the end of the day — but you really don’t know at what value. With a bond ETF, you can just go on exchange immediately, you can decide whether that’s the right price or not, and you can act on it. So there’s that.
The second part of it would just be the transparency issue. For mutual funds, you may have quarterly reporting or what have you, as opposed to daily for most bond ETFs — and that includes active strategies. So a lot of investors are attracted to that daily transparency as well.
Barry Ritholtz: And there used to be, I don’t know, tens of thousands of mutual funds out on the fixed income side. What sort of selection do ETFs present for bonds or fixed income in the exchange-traded fund wrapper?
Stephen Laipply: Well, it’s been exploding, particularly, I would say, since the ETF rule in 2019. And then also the pandemic and the subsequent policy responses, I think, unleashed a whole new level of demand with the normalization in yields. But standing here today, I think we’re over a thousand bond ETFs in the United States alone. iShares has over 160 in the US; we have over $900 billion in assets in the US, and $1.3 trillion globally.
The selection is enormous now. And it spans not just asset class — meaning Treasuries, credit, high yield, emerging markets, et cetera — but also, within a given asset class, you now have maturity cuts, you have outcome overlays on top of that, you have hedged products. So it’s been very, very much built out. And you also now have quite a lot of active strategies within those asset classes or sectors.
Barry Ritholtz: One of the criticisms that the equity side of ETFs always gets is, “Well, just wait till the next crash or period of stress — you’ll see how poorly these perform.” That didn’t happen during the pandemic crash. And then we started hearing the same criticisms about fixed income ETFs: Just wait till a moment of stress. How did ETFs perform in 2020 during COVID, and how did fixed income ETFs perform during the rate shock in 2022?
Stephen Laipply: Yeah, and this is what I think really garnered the next wave of adoption. Over the years, if you go back to the global financial crisis, they existed then, and we did have a lot of investors who were interested in them just because of this idea that, okay, during a crisis, I can see where things are trading on exchange — and that’s valuable, because now I can look at an investment grade credit ETF like LQD, or a high yield ETF like HYG, during the crisis and see what’s happening, which was very hard to do, if you remember back then. So the criticism was: Well, they’re small, they haven’t been around that long, I’m not really sure if I want to use them yet. I need to see them get larger and go through more stress tests. Okay — between the global financial crisis and 2020, there were kind of minor bumps here and there, but nothing severe.
I think 2020 — especially February and March, when even some Treasuries and investment grade were struggling to trade — finally got people over the line. Because at the worst of it, it was hard to trade off-the-run Treasuries, it was hard to trade investment grade. But ETFs, even though they may have been trading at a discount, were tradable, and they were trading in record volume. I think that finally got a lot of people over the hump. That was the test they were waiting for.
Barry Ritholtz: The rate shock — and they definitely passed with flying colors.
Stephen Laipply: Yeah. And then the rate shock was just icing on the cake — another stress episode, which further cemented investor confidence in the wrapper.
Barry Ritholtz: Let’s move beyond the structure of ETFs and start talking about fixed income investing in ETFs. Money markets are at 3.6%, 3.7%. And as we’re recording this, yields went up a little bit today on non-farm payroll data, but you’re not that far off from 4% — pretty competitive with the middle of the curve for bond yields. Why should investors think about rolling out of money markets and into bond ETFs in this rate environment?
Stephen Laipply: This is the question, and I think it doesn’t have to be a binary choice, right? What we’ve been saying is, if you think about what happened with views on the Fed over the last, call it, six months, it’s changed a lot, right? We went from having some cuts priced in to — as we’re standing here today — a full hike priced in by the end of the year, with another one priced in for next year, maybe more. And that could change just as rapidly going the other way.
So it’s really less about trying to time or finesse this, and more about just diversifying. Sure, you’re going to be able to earn decent carry in your money market account right now. But as a diversifier, what we’ve been saying is: Take at least some of that and step out on the curve — let’s call it intermediate, maybe three to seven years, something like that. Because in the event that things do change — for example, the geopolitical picture could change very, very rapidly; you could get oil prices receding, inflation kind of coming back down, et cetera — that will get us back off to the races in the other direction. And you know what’s really funny, Barry: If you look at the 10-year yield over the last three years, it kind of looks like a sine wave. You’ve been from 3.60 up to 5 and everywhere in between, over and over and over again. So it’s very, very hard to time this, right? Just don’t put all your eggs in one basket — have your bets spread out on the curve, because you never know how fast it’ll change.
Barry Ritholtz: Yeah, it’s kind of fascinating talking about the reversals. How long were we waiting for the Fed to start cutting? It seemed like it took years and years of people being wrong. And now we’re not only reversing the idea of cuts, but — given the war, given what’s going on with inflation — it’s amazing that it took such a short period of time to price in two hikes. But given where we are in the Fed cycle — I don’t even want to say cutting cycle — what does this lack of clarity mean for fixed income investors? How should they think about: Are we cutting? Are we raising? Are we going into a recession? Are we not going into a recession? It seems like it’s been an especially confusing period.
Stephen Laipply: Yeah, and this is what’s really fascinating to watch. Very interestingly, just based on the flows, we’re having record flows yet again this year, and that’s on top of records the prior several years. We are seeing investors kind of look through this volatility. And so far, I want to say that we’re up somewhere around 20 to 30% relative to last year. So investors don’t seem to be too concerned by the dramatically changing landscape here.
What they are focused on is the income opportunity. The majority of fixed income assets are now yielding above 4%. That was not the case — I think it was something like 20% between the crisis and the pandemic. So investors are actually looking at this as an opportunity where they can now earn income in fixed income for the first time in many years. They’re very focused on that, as opposed to just the 10-year, whether it’s at 4 or 5%. They’re focused on the income, and that’s how they’re allocating.
Barry Ritholtz: So we’re talking a little bit about inflation. I would be remiss if I didn’t bring up the iShares TIPS ETF. Our clients are owners of this; it’s done really well over the past couple of years. Tell us a little bit about why people should think about having a TIPS bond ETF in their portfolio.
Stephen Laipply: Yeah, and it’s proven to be really, really powerful, because it was not expected — everybody had pronounced inflation dead. We saw it come roaring back, and then there was the idea of a very strong policy response to rein it back in. Now we’ve gotten a supply shock in energy, which has sort of thrown things a little bit in doubt again. So it goes to the point that you should have a resilient portfolio, and that resilience — some of it has to be anchored in trying to protect against inflation.
It’s up to the investor to decide how much or how little they want to lean into that. You can buy individual TIPS bond ETFs, like STIP or TIP — we even have a shorter one, which is one-year, called ICPI — if you really want to just peg inflation itself. But I think other exposures are now incorporating it. We just launched, late last year, a broader bond ETF — so you think of the Agg, the Universal — we have something called the Total, which is BTOT, that includes an inflation component. The Agg and the Universal don’t have that; this one does. And that is a nod to the idea that going forward, you probably want to have some protection against inflation. It’ll wax and wane, but I think it shows you now that it’s necessary.
Barry Ritholtz: So TIPS are one sort of opportunity in the fixed income ETF area today. What other areas are attractive? Do you like investment grade corporates, high yield, munis, even agency mortgages and active bond ETFs? Where do you see the greatest opportunity set in the world of ETFs and fixed income?
Stephen Laipply: So let’s do that in two steps. Overall, I think you want to be in sort of that high-quality tilt, right? For many investors, that is a comfortable thing from a risk-profile standpoint. So getting back to the two dimensions here, credit and duration: On credit, we’ve seen the flows go mostly into very high quality — think Treasuries, investment grade, et cetera — but also kind of that intermediate duration component, as opposed to being much longer out on the curve. So investors are sort of anchoring on high-quality, intermediate duration.
Away from that, what also has been getting a lot of interest — going back to the income theme — investors really like what we’re calling these “plus” sectors. And what that means is: Okay, outside of Treasuries and investment grade, what do you have? You have high yield and emerging markets, which may not suit all investors, but you also have things like securitized assets, which offer a pretty attractive income profile relative to their duration risk. Think of mortgages as one part of that, but you can also have asset-backed securities, commercial mortgage-backed securities, things like that. So securitized assets have been really popular as well.
On the active side, as you know, Rick Rieder launched a multi-sector income ETF called BINC that has exposure to a lot of those plus sectors. And that fund has proven to be enormously popular — again, that income theme without taking outsized risk. So it’s that sort of general theme: Lean into income, de-emphasize duration, don’t take a huge amount of credit risk. I think that captures a lot of what we’re seeing investor interest in.
Barry Ritholtz: Last question: How should investors be thinking about the fact that we have a new FOMC chair in Kevin Warsh? What does that mean in terms of thoughts about duration, especially given how hawkish so many members of the committee are, and how publicly he’s stated he’s interested in Fed cuts?
Stephen Laipply: Well, this gets to something we’ve talked about in the past, Barry, which is that the market itself has already priced in what it thinks will happen. So the real question is less about who’s at the head of the Fed right now, and more about — if you look at where the market’s pricing Fed action, meaning we talked about this earlier in the conversation, we went from cuts to a hike priced in this year and maybe more next year — do you as an investor believe that?
Right? And that’s the question. Because if you look at the futures contracts, or if you look at the shape of the yield curve, you have to make up your mind: Do you believe that or not? If you don’t believe it — are you more hawkish than that? Are you more worried about inflation than that? — you may want to rein in your duration risk. If you think that none of that’s going to materialize, and then you could even go back to cuts, you may want to move out further on the curve. However, for many investors, if you don’t even want to try to call that — again, just be diversified, right? Maybe just sort of anchor in the middle part of the curve, the intermediate duration. Don’t go all the way to the short end; don’t go all the way to the long end. You don’t really know how this is all going to play out, and most investors aren’t really interested in trying to predict that. So just get your exposure, lean into income, and then be patient.
Barry Ritholtz: So to wrap up: Investors who want some fixed income exposure have a variety of choices today that they didn’t have just as recently as five years ago. It doesn’t matter if it’s mortgage-backs, inflation-hedged, global Agg, domestic — whatever you want in terms of exposure to fixed income, you can get that through bond ETFs.
I’m Barry Ritholtz. You are listening to Bloomberg’s At the Money.
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