Fixed Income ETFs Why Are Fixed Income ETFs Growing?

Fixed Income ETFs

Why Are Fixed Income ETFs Growing?

Lee Sterne, CFA Vice President, ETF Strategy

Angus Stewart, CFP? Director, Investment Product

Michael Hodapp

Fixed Income Regional Brokerage Consultant

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Fixed Income ETF Overview

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What Is an Exchange Traded Fund (ETF)?

An "ETF": A portfolio of securities that trades on an exchange

ETFs SHARE CHARACTERISTICS OF BOTH STOCKS AND MUTUAL FUNDS

STOCK

A security that is listed on a major exchange that can be bought and sold

at any time during the trading day.

MUTUAL FUND

A diversified portfolio of stocks or bonds..

ETF

A diversified fund that trades like a stock and can be bought or sold at any time during the

trading day.

ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually 3 redeemed from the fund.

ETF Features Are Driving Popularity with Investors

ETFs offer:

DIVERSIFICATION A way to build a

portfolio that meets specific asset allocation goals

PRICING Continuous pricing

and trading throughout the day

TAX EFFICIENCY Lower portfolio turnover and, for

certain ETFs, the ability to do in-kind

redemptions

LOWER COST Potentially lower expense ratios

TRANSPARENCY Typically disclose

holdings daily

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Fixed Income ETF Market

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Fixed Income ETFs--A Growing Market

Fixed income ETF assets have more than doubled over the last 5 years, on the back of strong inflows

Total Assets Cumulative Flows

FIXED INCOME ETF ASSET TREND

$600B

$500B $400B

Assets have increased >2x over

the last 5 years

$300B

237.2

$200B

$100B

$0B

549.5

FIXED INCOME ETF CUMULATIVE FLOWS

$600B

$500B

$400B

$300B

$200B

$100B

$0B

Aug 2012 Aug 2013 Aug 2014 Aug 2015 Aug 2016 Aug 2017 Aug-2012 Aug-2013 Aug-2014 Aug-2015 Aug-2016 Aug-2017

Includes all ETFs in Morningstar's U.S. Municipal and Taxable bond categories. 6 Source: Morningstar Direct as of 8/31/17.

Broad Range of Fixed Income ETFs for Investors

Fixed income ETFs span several categories and investing approaches

CHOICE OF INVESTMENT MANAGEMENT STRATEGY

2%

5%

Passive Active Strategic Beta

ABILITY TO TARGET EXPOSURE TO INVESTMENT GOALS

Long-Term,

Emerging

4%

Market, 4%

Municipal, 5%

World, 2%

93%

Other, 6%

Intermediate -Term, 27%

FULL ACCESS TO THE GLOBAL BOND MARKET

InflationProtected,

7%

25% 75%

Domestic International

High Yield, 9%

Corporate, 14%

Short-Term, 22%

Source: Morningstar Direct as of 8/31/17. Includes all ETFs in Morningstar's U.S. Municipal and Taxable bond categories. In the pie chart on the right, Other includes non-traditional 7 bond, multisector bond, and preferred stock categories.

Growing Demand for Actively Managed Fixed Income ETFs

Fixed income active ETF assets have grown much faster than overall fixed income ETFs

Total Assets Cumulative Flows

ACTIVE FIXED INCOME ETF ASSET TREND

$35B $30B

30.5

$25B $20B

Assets have increased >4x over

the last 5 years

$15B

$10B

6.8

$5B

$0B

ACTIVE FIXED INCOME ETF CUMULATIVE FLOWS

$25B $20B $15B $10B

$5B $0B

Aug 2012 Aug 2013 Aug 2014 Aug 2015 Aug 2016 Aug 2017 Aug-2012 Aug-2013 Aug-2014 Aug-2015 Aug-2016 Aug-2017

Includes all ETFs in Morningstar's U.S. Municipal and Taxable bond categories. 8 Source: Morningstar Direct as of 8/31/17.

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