Building better beta
As markets have evolved, our indices evolve as well. But replicability and transparency remain fundamental to benchmark construction. Fixed income has continued to grow in size, and the investment grade universe as measured by the Bloomberg US Aggregate Index now covers roughly 13,600 constituents with $28 trillion in market value (see below). In addition, assets in fixed income ETFs are expected to multiply in the coming years, so ensuring that clients can accurately track our indices continues to be a big focus. We have published a daily forward-looking Projected Universe for many years to facilitate portfolio rebalancing, and we will apply a month-end lockout period starting in March to freeze the membership two days ahead of month-end. This much-anticipated change will provide more stability in the index membership and certainty as to which bonds qualify for the Returns Universe prior to month-end. Other enhancements such as alternative pricing snaps and frequency of rebalancing are also under review.
Another area of recent evolution has been the ways in which our clients can gain exposure to our indices. The explosion of ETFs has made it much easier for clients to trade hundreds of Bloomberg indices, but even the almighty ETF has weaknesses such as tracking error. Enter credit futures. Exchange-listed futures on Bloomberg’s fixed income indices provide investors with the ability to more accurately and efficiently gain exposure to the corporate bond market and hedge their credit risk. We launched three futures contracts on CME in June 2024 and two additional contracts on Eurex in September 2024 to expand our offering across IG, HY and EM (see below). In particular, the duration hedged (DHI) futures are spread return products akin to other credit products widely used for hedging etc. Across the complex, we are approaching $100 billion in cumulative value traded since inception. We expect to see more listed contracts, providing a more diverse range of tools for those seeking local exposure and precision.
Index trends
From a fixed income index perspective, there were a few dominant themes throughout last year that we expect to continue into 2025. First, short duration and money market strategies were very popular given that risk-free rates were at the highest level in more than 15 years. Even though the Fed has started cutting rates, “bill and chill” investing should continue to some extent until rates normalize. In fact, net flows in ultrashort bond ETFs have continued to be robust at $25.9bn over the last 3 months despite 100bp in cuts since mid-September. Bloomberg expanded coverage of 0-1 Year and created Hold to Maturity indices (see below) last year to meet this anticipated demand, and we also created Cash Deposit indices across 9 currencies with 1m, 3m and 6m tenors which can be found on the IN CASH
Second, fixed maturity indices continued to gain momentum across regions and assets classes. Out of the nearly 400 fixed income ETFs launched in 2024, over a quarter of them (28%) seek to invest in bonds that mature in a specific calendar year. Since the introduction of fixed maturity ETFs in 2015, assets now exceed $50 billion across the two largest suites of ETF products. Bloomberg has created dozens of fixed maturity benchmarks for passive ETFs and recently published a series of standard fixed maturity indices for US Corp, Euro Corp and US Treasury. We expect this trend to continue as more clients enter the space and further customization is employed.
Lastly, customization and finding new sources of beta has been a long-term theme that we continue to see growing into 2025 and beyond. Our team has been customizing indices for decades on behalf of clients, and the Index Factory platform unlocks additional datasets and more flexibility to help our clients put their exciting new ideas into an index strategy. In fact, we published almost 500 new bespoke indices last year alone.
Fixed income outlook
In addition to tracking historical returns, we can also look at performance expectations through an index lens, although past performance is not indicative of future results. In general, one would expect for US fixed income to perform well in a tightening cycle as rates decrease. Our colleagues in Bloomberg Intelligence (BI) expect modest but volatile Treasury returns, wider spreads in IG Credit to offset projected declines in Treasury yields, and the best performance since 2019 for MBS in our base case. On aggregate, that would roughly equate to a performance of 4.9% for the US IG market as measured by the Bloomberg US Aggregate Index (see below). However, slower Fed cuts and inflation uncertainty could weigh on bond returns.
Looking ahead
After a year of milestones and major index launches, we are looking forward to more of the same in 2025. We are always looking at ways to expand our coverage and make our index suite more comprehensive. Following the introduction of our Bloomberg US Leveraged Loan index, we are planning to publish a European version in the first half of the year. Additionally, our Local EM indices will undergo a significant update as India will be included over a 10-month period starting in February. Once fully phased in, India is expected to be the third largest country in the EM Local Currency Government Bond Index. Lastly, we expect to rollout multiple pricing snaps later in the year. One key use case will be for early close dates so clients can select either 2pm or 4pm as the official index close.
Even after more than 50 years of indexing, we are more excited than ever about the coming opportunities and challenges. We appreciate the partnership of our invaluable clients and look forward to celebrating many more milestones together.
