Income Is Back In Fixed Income

This paper explains the fundamentals of fixed income exchange traded funds (“ETFs”) and examines the drivers behind swift adoption within investors’ portfolios. In recent years unprecedented market shocks such as the COVID-19 pandemic and the Russia-Ukraine invasion have contributed towards rising inflation and macroeconomic challenges. Subsequent market volatility and turbulence have accelerated adoption of the fixed income ETF wrapper leading to record trading volumes. This has been further driven by the complexities experienced when trading underlying bonds. The underlying bond market is typically traded over the counter (“OTC”), with associated transaction costs and large denominations which can create complex hurdles for direct bond investors. Fixed income ETFs provide standardised and cost-effective access to fixed income indices.

Xtrackers’ guide to Synthetic Replication

Investor demand has continued to drive growth in the synthetic ETF market in Europe this year. The widespread adoption of ETFs has led to a surge in investors looking to adopt synthetic ETFs as cost-effective tools to access a variety of different investment exposures. Despite their growing popularity, there is a misconception that synthetic ETFs are perceived as a more challenging structure to comprehend. To help investors better understand the replication method, we revisit the key differences between physical and synthetic replication whilst using case studies to highlight the benefits of synthetic replication and make it more tangible for investors. The final section of the paper addresses concerns investors might have, potential risks and how they are mitigated.