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Franklin Templeton ETF Head: "Bond Indexes Are Broken"

• https://www.zerohedge.com by Tyler Durden

While there have been many theoretical explanations why the passive ETF bid for bonds is a ticking timebomb, with Oaktree's Howard Marks perhaps making the best arguments ever since his March 2015 thought experiment in which he asked what would happen if ETF holders "sold all at once" resulting in a bidless market, a more tangible - if simple - explanation has come from the head of global ETFs at Franklin Templeton who stated simply that fixed-income indexes are now "broken," which makes active management a necessary component for successful bond ETFs.

"Investors typically have gone into passive fixed income primarily because that's all there was," Patrick O'Connor said Thursday in an interview on the sidelines of the Inside ETFs Canada conference in Montreal quoted by Bloomberg. "But as a firm, and as an active manager, we don't just think indexes are flawed in fixed income, we think they're broken."

Here is the paradox: according to O'Connor, the weight of individual securities in fixed-income indexes is often determined by debt issued, meaning companies that issue more debt will have a higher weight in an index-based ETF.

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