At The Money: How Fixed-Income Investors can use ETFs to their Best Advantage.

0:00So there's a lot of noise about AI, but time's too tight for more promises. So let's talk about results. At IBM, we work with our employees to integrate technology right into the systems they need. Now, a global workforce of 300 ,000 can use AI to fill their HR questions, resolving 94 % of common questions. Not noise. Proof of how we can help companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business. IBM. At Venture Global, we think about what can be done, not what's usually done. Through innovation, Venture Global is not only building some of the largest energy facilities in the world right here in the United States, but delivering American energy at a fraction of the cost and a fraction of the time.

0:49So while others are busy talking, we're busy building. That's Venture Global. That's unstoppable energy. Small businesses are the pulse of every community. They bring people together, create opportunities, and drive growth. Chase for Business helps business owners like you with personalized guidance and convenient digital tools all in one place. With that guidance and your determination, you can take your business farther and help build a brighter future for your community. Learn more at chase.com slash business. Chase for Business. Make more of what's yours. The Chase mobile app is available for select mobile devices, Message and data rates may apply.

1:30JPMorgan Chase Bank, N.A. Member FDIC. Copyright 2026. JPMorgan Chase and Company.

1:57Money is coming to me. 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 Steve Lapley. He's Managing Director at BlackRock and Global Head of iShares Fixed Income ETFs.

2:44Previously, he was the 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? Good to see you, Barry. Thanks for having me. So this has been a bit of a journey that spans decades, actually. And so to really understand the power of bond ETFs, you have to kind of go back before they existed. So let's call that, you know, kind of late 90s. The very first bond ETF came out in Canada in the year 2000 and then in the U.S.

3:29in 2002. But if you go back to the 90s, buying bonds was a non-trivial exercise. And the way it was done, it was a very much voice driven market. 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, et cetera, et cetera, and kind of uneven access. So depending on who you were and what kind of wallet you had, you might get different treatment. And so that was a problem for some investors, not for all, for investors who had access. Maybe they viewed that as an advantage.

4:11But for a lot of us, it was really challenging to build a high quality, diversified bond portfolio. So what would bond ETFs do? They actually opened that whole world up to transparency. You basically now had not even a single bond, but a portfolio bonds that trade on exchange. You know what's in it. You could see the price on exchange every second ticking by. So you don't have to pick up the phone and call people. You just simply can 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, etc.

4:50But it was just a shocking, revolutionary thing to be able to trade bonds on an exchange. So that makes a lot of sense. I remember when this market was very dealer driven, but there was always an option or at least over the past, let's call it 40 years, an option 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? Well, there are a couple. You know, mutual funds still play a role. You'll tend to see them in 401ks and things like that. That's more of an architecture thing.

5:36But 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 really what the valuation is. And so 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, you know, Barry, let's just say you get, you know, a strong inflation number or, you know, 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. You really don't know at what value.

6:12Bond ETF, you can just go on exchange immediately and 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. 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?

6:54Well, it's been exploding, particularly, I would say, since the ETF rule in 2019. And then also, you know, 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 U.S. We have 1.3 trillion assets in the U.S. Or sorry, over 900 billion in the U.S. and 1.3 trillion globally. But the selection is enormous now. And it spans not just asset class, meaning treasuries, credit, high yield, emerging markets, etc., But also within a given asset class, you now have maturity cuts.

7:44You 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. One of the criticisms that the equity side of ETFs always get 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 either in 2020 during COVID and how did fixed income ETFs perform during the rate shock in 2022?

8:28Yeah. And this is what I think really garnered the next wave of adoption, because over the years, if you go back to, you know, sort of 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, OK, during a crisis, I can see where things are trading on exchange. And OK, 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 is very hard to do if you if you remember back then. And so the criticism was, well, they're small.

9:06They haven't been around that long. Not really sure if I want to use them yet. I need to see them get larger and go through more stress tests. So 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, I think that 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.

9:46And I think that finally, finally got a lot of people over the hump. That was the test they were waiting for. And they definitely passed with flying colors. Yeah. And then the rate shock was just icing on the cake. You know, another stress episode which further, I think, cemented investor confidence in the wrapper. So let's move beyond the structure of ETFs and start talking about fixed income investing in ETFs. Money markets are 3.6, 3.7. 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?

10:38And this is the question. And I think it doesn't have to be a binary choice, right? So what we've been saying is that if you think about what sort of 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. Now we've got, you know, as we're standing here today, now we have a full hike priced in by the end of the year. We have another one priced in for next year, maybe more. And that could change just as rapidly going the other way. And so it's really less about, you know, trying to time or finesse this and more about just diversifying.

11:16So 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 step out on the curve, you know, let's call it intermediate, you know, 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 sort of oil prices receding, inflation kind of coming back down, etc. That will get us back off to the races 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.

11:56You've been for, you know, 360 up to five and everywhere in between over and over and over again. And so it's very, very hard to time this, right? So just don't put all your eggs in one basket, have your bets, you know, sort of spread out on the curve because you never know how fast it'll change. Yeah. It's kind of fascinating talking about the reversals. How long were we waiting for the Fed to start cutting. And it seemed like it took years and years of people being wrong. And now we're reversing, not only reversing the idea of cuts, but given the war, given what's going on in inflation, it's amazing that it took such a short period of time to price in two hikes.

12:38But given where we are in the Fed cycle, I don't even want to say cutting cycle, Um, 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 especially confusing period. Yeah. And this is what's really fascinating to watch is that investors very interestingly, just based on the flows, you know, we're having record flows, you know, yet again this year, and that's on top of records of prior several years, we are seeing investors kind of look through this volatility.

13:17And so far, you know, I want to say that we're up somewhere around 20 to 30 percent relative to last year. So investors don't seem to be too concerned by the dramatically, you know, kind of changing landscape here. What they are focused on is the income opportunity. So the majority of fixed income assets are now yielding above 4%. That was not the case. I think it was something like 20 % before the pandemic, between the crisis and the pandemic. And 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. And they're very focused on that, as opposed to just, you know, the 10-year, whether it's at 4 % or 5%, they're focused on the income.

14:02And so that's how they're allocating. 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. They've 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. 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 very strong policy response to rein it back in. Now we've gotten a supply shock in energy, which has sort of, you know, thrown things a little bit in doubt again.

14:47And so it goes, you know, to the point that you should have a resilient portfolio and that resilience, some of which has to be anchored in trying to protect against inflation. And so it's up to the investor to decide how much or how little they want to lean into that. And so 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. So, you know, we just launched late last year a broader bond ETF. So you think of the ag, the universal, we have something called the total, which is BTOT.

15:29That includes an inflation component. So the ag 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. So tips are one sort of opportunity that's 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? What do you see the greatest opportunity set in the world of ETFs and fixed income? So let's do that in two steps.

16:11I think 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. So credit, we've seen the flows go mostly into very high quality. So think treasuries, investment grade, et cetera, but also kind of that intermediate duration component as opposed to being much longer in 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.

16:57And what that means is, okay, outside of treasuries and investment grade, what do you have? Yeah, you have high yield in emerging markets that 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, et cetera. And so think of that as mortgages are one part of that, but then 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 Reeder launched a multi-sector income ETF called BINC Bank that has exposure to a lot of those plus sectors.

17:40And that fund has proven to be enormously popular. Again, that income theme without taking outsized risk. And so it's that sort of general theme, let's lean into income, deemphasize duration, not take a huge amount of credit risk. I think that sort of captures a lot of what we're seeing investor interest in. Last question. How should investors be thinking about the fact that we have a new FOMC chair and 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 stated he's interested in Fed cuts. Well, and this gets to something we've talked about in the past, Barry, which is, you know, the market itself has already priced in what it thinks will happen.

18:33So the real question is less about who's, you know, 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? 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?

19:07you 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? So 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 just be patient.

19:46So 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 hedgebacks, inflation hedged, global ag, domestic, whatever you want in terms of exposure to fixed income, you can get that through bond ETFs. I'm Barry Ritholtz. You're listening to Bloomberg's At The Money.

20:20Get the news you need in just 15 minutes. Start your day with Bloomberg Daybreak, the podcast with a global view on the stories that matter. I'm Nathan Hager. And I'm Karen Moscow. Join us each morning for curated stories on current events, politics, business, and foreign relations. Plus one conversation on the day's biggest developments, all in just 15 minutes. Subscribe to Bloomberg Daybreak for a precise, thoughtful take on the stories that matter. Listen to Bloomberg Daybreak each morning on Apple, Spotify, or anywhere you listen.