Understanding your objectives and risk tolerance for your fixed income investment is the most important element of investing. Is your style dynamic or buy and hold? The ETF should be as precise a match for your investment objectives as possible.

Are you investing strategically over the long term or tactically? Is your style dynamic or buy and hold? The transparency, tradeability and cost-efficiency* of ETFs may help strategic investors with a 5- or 10-year horizon who are cost and tracking conscious, as well as tactical investors with a 3-month horizon looking for easy and liquid access.

Diversification across factors such as region, country, asset class and currency can help lower idiosyncratic risk and overall portfolio volatility. On the other hand, ETFs can also be a precision tool, giving investors the targeted exposure they want, or avoiding unwanted exposures.

The method may have implications for the ETF’s tracking error, cost and risk. The method of choice for many fixed income ETFs is an optimisation/sample-based approach to create a representative or optimised portfolio of securities that closely matches the characteristics of the underlying index.

Even as new indices are constructed, the index family’s (e.g. Bloomberg, FTSE Russell, S&P Dow Jones Indices) tenure in the marketplace can indicate a measure of stability.

Disparate index weighting methodologies can lead to differences in performance and risk/return characteristics among seemingly similar indices.

Transparent holdings data is key for understanding the benefits and risks in the underlying bonds. This data should be easily available on the index provider’s website.

Traditionally, fixed income indices rebalance monthly on the last business day of the month. It allows for concentrated trading at month end and includes new issues.

Significant portfolio overlap can leave your portfolio over-exposed to various regions, issuers or durations. An index approach may ensure there is little or no overlap due to its transparent nature.

The main sources of risk associated with fixed income indices are: currency risk, interest rate risk, credit risk and liquidity risk.

Large, well-established firms with a long ETF history may have an advantage in this evolving marketplace.

Total assets may indicate investment expertise and stability, while high ETF assets further illustrate a commitment to the ETF marketplace.

A broad range should contain exposure to all the maturities and regions that you need in order to effectively manage the yield curve, credit, and sector allocations.

A trusted partnership between the index provider and the ETF issuer helps ensure the sustainability of products in the long run, and the ability to meet client needs for product support and new offerings.

In today’s dynamic ETF marketplace, expert trading support can positively impact your bottom line.

Local investment teams and operations allows for specialism in each credit market, for example.

For an investor to effectively manage their fixed income allocations, transparent communication from the ETF provider is indispensable. For example, we provide easy access for professional investors to speak directly to our Capital Markets Group, strategists and client services.

An ETF’s total cost of ownership often compares favourably to a mutual fund’s expense ratio. Aside from management fees and fund overhead costs, the total cost of gaining the exposure could include factors such as trading spreads or swing factors, brokerage, among others.

The frequency of rebalancing can impact costs.

A narrow bid-ask spread versus the underlying basket of securities’ bid-ask spread could indicate an opportunity to gain exposure at a lower cost.

Returns can deviate somewhat from the index, but profound differences may be a red flag for poor management or excessive trading costs.

The trading route you take impacts your bottom line. A supportive ETF issuer will be able to help each professional investor assess the best route for their particular investment requirements. Our Capital Markets Group can help.

Due to their unique creation/redemption process whereby Authorised Participants (APs) create and provide liquidity when it is needed, ETFs have potential liquidity that may not be evident from assessing trading volume.

Due to their unique in-kind creation/redemption process, an ETF’s liquidity actually reflects the liquidity of the underlying securities. Therefore, if the ETF holds thinly traded securities, APs may find it more difficult to source liquidity during times of market stress. Additionally, traded volume is not the only indicator of liquidity, and it is always advisable to contact the Capital Markets Group during these times.

Large spreads between the bid and ask price often indicate an illiquid ETF, so you will want to study the spreads and market movements over time.