[This article appears in our November 2019 issue of ETFR.]
It’s the year of the bond ETF … again.
As of the end of September, bond ETFs had already brought in $112 billion in new net investment assets, well outpacing flows into all other asset classes combined (see Figure 1).
It’s no secret why these funds have been so popular lately: Just open a newspaper (or Twitter) and scan the day’s headlines. Falling interest rates. Fears of recession. Political instability abroad and at home. All this uncertainty has sent ETF investors flooding toward the fixed income space, scrambling for whatever safety and yield they can find.
Most Popular Bond ETFs: Big, Cheap & High Duration
For the most part, investors have gravitated to large, proven funds, with strategies that they already know work.
The top 10 most popular bond ETFs of 2019 all share one thing in common: They’re enormous. Almost all of them already had over $10 billion in assets invested, before the year even began (see Figure 2).
Another unifying theme is low cost. All but one of the top-gaining ETFs costs 15 basis points or less; the only exception is the $18 billion iShares iBoxx USD High Yield Corporate Bond ETF (HYG). HYG costs 0.49% annually, but that long-term holding cost is less important to investors who largely use it as a short-term trading tool. (However, HYG also offers a compelling 5.87% yield right now, another possible reason investors have gravitated toward it as of late).
Finally, many of the top-flows-getting bond ETFs are long in duration; meaning, they’re highly sensitive to fluctuating interest rates. When interest rates fall, bond values tend to go up—more so for bonds with higher durations.