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Report: Institutional Investors Plan to Increase Indexed Fixed Income Exposures

State Street Global Advisors’ Survey Further Highlights Expected Rise of ETFs for Fixed Income Allocations, as well as the Integration of ESG in Fixed Income Strategies

State Street Global Advisors, the asset management business of State Street Corporation (NYSE: STT), today announced the results of a global survey that shows institutional investors have an increased appetite for indexed fixed income strategies across a multitude of major investment themes, including the fast-growing environmental, social, and governance (ESG) theme.

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The findings revealed that exchange-traded funds (ETFs) are becoming an important fund vehicle for fixed income portfolio construction. The survey also found that investors believe the liquidity and price discovery benefits of fixed income ETFs became more attractive after witnessing COVID-19-driven market turbulence in Q1 2020.

According to the report, “Fixed Income: Preparing for the Big Shift,” while institutional investors still see value in active fixed income portfolio management, active approaches are increasingly under pressure to deliver alpha, and investors are interested in maximizing yield while minimizing costs and risks. The findings are based on a survey of global pension and sovereign wealth funds, as well as wealth and asset managers.

“The findings of our research validated trends we’ve observed playing out among institutional investors recently,” said Gaurav Mallik, chief portfolio strategist for State Street Global Advisors. “In the search for yield, institutional investors are shifting their portfolios to incorporate fixed income at a lower cost, and accompanying that shift is a focus on yield, liquidity and transparency. As an indexing and ETF leader, we remain well-positioned at the forefront of these trends, and we are dedicated to helping clients navigate this upcoming shift and achieve their goals.”

The Move to Indexed Fixed Income

The survey findings confirmed that indexed fixed income is delivering strong value accessing the sectors and building blocks that investors find useful in a cost-effective and transparent way. Respondents confirm that while active management of fixed income strategies still dominates, there is a strong interest in adding index exposure which translates to both a challenge and an opportunity for a shift to indexing in an evolving fixed income market:

  • A majority (76%) of survey respondents have less than 30% of their fixed income portfolio currently allocated to index strategies.
  • Two-thirds (66%) of respondents are prioritizing increased use of indexing for broad or liquid core fixed income exposures over the next three years. Slightly fewer (63%) respondents are prioritizing increased use of indexing for less liquid, non-core/satellite fixed income exposures over the same time frame.
  • More than one-third of survey respondents plan to increase their allocation to each of the following index strategies over the next three years: high yield (44%), developed market sovereign (37%), emerging market debt (36%), global aggregate/core (35%), and investment grade corporate (35%).

ETFs in the Fixed Income Toolkit

Institutional investors have plans to increase ETF use within their fixed income portfolios. The report found that:

  • More than two-thirds (71%) of survey respondents have a strong appetite to increase the use of ETFs within their global aggregate/core fixed income portfolios in the next three years.
  • Nearly half (48%) of respondents have a strong appetite to increase the use of ETFs within their non-core/satellite fixed income exposures in the same time period.
  • In addition, more than two-thirds (68%) of respondents say they are prioritizing increased use of ETFs for fixed income portfolio construction in the next three years.

ESG Moves Toward Full Integration

ESG is a mainstream consideration for institutional fixed income investors. Among its other benefits, ESG is seen as providing a quality lens through which to view fixed income strategies. The survey found:

  • Six in ten (61%) respondents say that they are prioritizing the integration of ESG factors within their fixed income portfolio in the next three years.
  • A variety of approaches are used to incorporate ESG issues into fixed income portfolios, with the “best-in-class” approach (cited by 49%) and “impact” approach (cited by 39%) being most frequently employed.
  • More than half (58%) of respondents say they are most likely to use ETFs as their preferred fund vehicle for increasing allocations to fixed income ESG strategies in the same time frame.

China, Emerging Markets Come Online

In October 2021, Chinese sovereign bonds will be added to the FTSE WGBI, opening a major new section of the fixed income market to institutional investors. China’s inclusion in this index also points to a normalization of investment and operations, as well as a normalization of liquidity and hedging requirements.

  • More than a quarter (27%) of survey respondents currently prioritize development of a dedicated, standalone fixed income exposure for China in the next three years.
  • Not surprisingly, respondents from firms with the highest assets under management are more likely to be developing a dedicated China exposure.
  • Institutional investors are most likely to use a combined active/index strategy for the emerging market debt segment of their fixed income portfolio.

About the Survey

This survey was conducted online in May of 2021. There were 360 respondents who were limited to senior leaders and senior portfolio managers who are directly involved in fixed income portfolio construction and investment decisions at pension funds, wealth managers, asset managers, and sovereign wealth funds. For more information, see the full report:

About State Street Global Advisors

For four decades, State Street Global Advisors has served the world’s governments, institutions and financial advisors. With a rigorous, risk-aware approach built on research, analysis and market-tested experience, we build from a breadth of active and index strategies to create cost-effective solutions. As stewards, we help portfolio companies see that what is fair for people and sustainable for the planet can deliver long-term performance. And, as pioneers in index, ETF, and ESG investing, we are always inventing new ways to invest. As a result, we have become the world’s third-largest asset manager with US $3.9 trillion* under our care.

*This figure is presented as of June 30, 2021 and includes approximately $64 billion of assets with respect to SPDR® products for which State Street Global Advisors Funds Distributors, LLC (SSGA FD) acts solely as the marketing agent. SSGA FD and State Street Global Advisors are affiliated.

Important Risk Information

All forms of investments carry risks, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone.

The information provided does not constitute investment advice and it should not be relied on as such.

© 2021 State Street Corporation - All Rights Reserved



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