Is managing fixed income ETFs any different to equity?

Bond vs equity indexing – the machinery behind the ETF

23 oct 2019

Construction of bond and equity ETFs is very different. For example, replicating equity indices is comparatively less complex because this asset class is much more liquid than bonds. In addition, the prices of the underlying shares traded on the stock exchange are more transparent. The framework for bond trading, on the contrary, is more complex and the replication of an index is generally much more demanding, with liquidity bottlenecks being more frequent for corporate bonds in particular.

Turnover is another differentiator between the two asset classes, being often higher for bond indices due to changes in maturities, credit ratings and new issues. Equity and bond indices consequently require a different portfolio management infrastructure. The performance of fixed income investments is generally perceived as more stable, but indices are more complex. Accordingly, the management of such investments can be far more intricate and require a more powerful, more sophisticated technology.


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