The ETF-ization of everything. RT @indexuniverse: Grant: Advent Of Gold ETF $GLD Transformed The Gold Market #InsideETFs

— Tadas Viskanta (@abnormalreturns) February 12, 2013

The “ETF-ization of everything” is an ongoing theme here at Abnormal Returns. It represents one of the big thorns in the side of the rise of ETFs. In short, the ETF industry in its drive to create new and novel ETFs is in fact changing the underlying nature of markets themselves. Let’s look at a new example.

It is no secret that I am a big fan of target date maturity bond ETFs. They help bridge the divide between bonds and bond funds and provide a useful tool for investors looking to build out their bond portfolios. The ETF industry has noticed as well. ETF giant Blackrock ($BLK) is launching a series of target date corporate bond ETF with the explicit hope that they get used by institutional investors and banks to help manage their exposures. From a Reuters report:

The new ETFs are designed to simplify the task of institutional money managers like bank treasurers, who currently must juggle hundreds or even thousands of distinct bond issues in their portfolios, BlackRock President Robert Kapito said on Wednesday…

“I think this will be the biggest product that’s ever hit the fixed income market,” Kapito said, speaking at a Credit Suisse conference in Miami.

It seems that the entire bond ETF landscape is becoming more institutionalized as the former liquidity providers, bank bond desks, continue to reduce their exposure. Julie Segal at Institutional Investor looks at how asset managers are now using ETFs in this new environment. Segal writes:

Exchange-traded bond funds are on a roll. They gathered $70 billion last year, a 31.4 percent increase over 2011, according to New York-based asset manager BlackRock. The obvious explanation is that investors want low-cost, transparent strategies for their savings. But there’s another reason for the soaring popularity of fixed-income ETFs. Money managers, advisers, pension funds and insurance companies are using these easily traded funds to prepare for the day when interest rates begin climbing, bonds lose value and investors scramble to sell into a market still largely dependent on weakened Wall Street dealers.

So you can see how target-date maturity bond ETFs would be attractive in this new bond market regime. Does that mean investors should avoid target-date maturity bond ETFs? Not necessarily, but you should at least be aware that that the nature of the marginal “investor” in this market is changing and they have very different goals than you.