Active Fixed Income ETFs Gaining Ground

July 01, 2019

While it has been a record-breaking first half for fixed income ETFs driven by low cost index-based strategies, investors also continue to pour new money into actively managed ones. Managers of such funds can seek attractively valued bonds as well as adjust the interest rate sensitivity to reflect shifting sentiment on the Federal Reserve’s next move.

As of late June, fixed income ETFs gathered approximately $70 billion this year, with more than $7 billion pouring into actively managed ETFs. While the active component remains relatively small, the $63 billion base has climbed to 8.3% of the $763 billion fixed income ETF market, up from a 5.3% share at the midpoint of June 2017.

We presume much of the demand in 2018 was due to a flight to safety amid rising interest rate concerns. Indeed, the four largest active fixed income ETFs invest in bonds with maturities of less than one year: the PIMCO Enhanced Short Maturity Active ETF (MINT), the JPMorgan Ultra-Short Income ETF (JPST), the iShares Short Maturity Bond ETF (NEAR) and the First Trust Enhanced Short Maturity (FTSM). These four ETFs gathered $15 billion in 2018 and some of them more than doubled in size.

Change In Direction

Investors reversed course in the first half of 2019, and market sentiment is now for three interest rate cuts in 2019, even as CFRA is skeptical of the Fed meeting such expectations. In this environment, it is more surprising that the leading ultra-short bond quartet pulled in more than $3 billion in new money thus far in 2019.

But MINT offers a 2.6% yield, easily above the 10-year Treasury bond, while incurring average duration of just three months. NEAR has an identical yield, but there are slight differences between it and MINT. NEAR’s expense ratio is more modest (0.25% vs. MINT’s 0.35%), but its average duration is slightly higher.

 

Active Fixed Income ETFs Gaining Ground

Ticker Fund AUM ($B) 2018 Flows ($B) YTD 2019 Flows ($B)
MINT PIMCO Enhanced Short Maturity 11.9 4.22 -0.35
JPST JPMorgan Ultra-Short Income 7.5 5.00 2.34
NEAR iShares Short Maturity Bond 6.5 3.00 0.57
FTSM First Trust Enhanced Short Maturity 4.6 2.63 0.48
FPE First Trust Preferred Securities 3.7 0.17 0.42
TOTL SPDR Doubleline Total Return Tactical 3.3 -0.50 0.23
LMBS First Trust Low Duration Opportunities 3.0 1.09 0.90
GSY Invesco Ultra Short Duration  2.4 1.00 0.32
BOND PIMCO Active Bond  2.4 -0.11 0.29
SRLN SPDR Blackstone/GSO Senior Loan  2.2 0.01 -0.04
Total   47.5 16.51 5.16

Source: ETF.com, June 21, 2019

 

In 2019, demand also has been strong for those active ETFs that incur greater interest rate risk. For example, the PIMCO Active Bond ETF (BOND), which currently has duration of 4.8 years, had approximately $300 million of net inflows to start 2019, after experiencing slight outflows in 2018. The fund’s 3.2% yield is higher than the ultra-short funds listed above.

Meanwhile, the First Trust Preferred Securities & Income ETF (FPE) added more than $400 million in new money this year, more than double the net inflows from all of 2018. The fund’s yield of 5.8% partially reflects its 3.8 years of average duration and exposure primarily to bonds rated BBB and BB.

Rounding Out The Top 10

The 10 largest actively managed fixed income ETFs recently had $48 billion in assets, aided by $16.5 billion of net inflows in 2018 and $5.2 billion to start 2019. The SPDR Doubleline Total Return Tactical ETF (TOTL), the First Trust Low Duration Opportunities ETF (LMBS), the Invesco Ultra Short Duration ETF (GSY) and the SPDR Blackstone / GSO Senior Loan ETF (SRLN) are other ETFs in the top 10. Fidelity, Janus Henderson and PGIM also offer active fixed income ETFs.

CFRA will be discussing the active fixed income ETF landscape and what makes fixed income ETFs different in an upcoming webinar on July 10 at 11 a.m. ET. Join us and PIMCO Funds by registering at https://go.cfraresearch.com/Active-Fixed-Income-ETFs.

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