Fixed Income & Active ETFs Rolling

Key Takeaways

• In 2020, investors not only pushed U.S. listed fixed income ETFs to more than $1 trillion in assets with likely record inflows, but proved liquidity fears were overblown. The iShares iBoxx USD Investment Grade Corporate Bond ETF (LQD) and other corporate funds gathered $80 billion year-to-date through November.
• Actively managed ETFs were further embraced, as fixed income funds gathered 13% of the category flows this year, and the equity offering ARK Innovation ETF (ARKK) broke into the top 20 overall asset gatherers in 2020.
• Nearly as many active ETFs launched thus far in 2020, as in 2018 and 2019, combined with BlackRock and Fidelity expanding their ETF presence, and firms like Dimensional Funds, T. Rowe Price and TrueShares among those entering the market.

CFRA is recapping some of the biggest ETF trends before 2020 fades in the rearview mirror.

Although 70% of ETFs in the CFRA First Bridge ETF database were up year-to-date through November, many investors are ready to move to a new year, one where COVID-19 vaccines are freely available and a new normal can proceed. Before we get there, let us look at what has made this past year exciting for the ETF industry.

With $189 billion of net inflows year-to-date through November, surpassing any previous full-year inflow total, U.S. fixed income ETFs eclipsed the $1 trillion mark.

While U.S. equity ETFs roared back in favor in November, following the election and favorable news about potential COVID-19 vaccines, fixed income ETF success has been the bigger story in 2020.

Despite strong inflows in 2019, concerns lingered heading into 2020 that these products were untested, and demand could dry up during periods of market volatility. The reality is that investors, and even the Federal Reserve, turned to ETFs such as LQD in the first half of 2020 as bond market liquidity dried up.

Chart 1: ETF Asset Category Breakdown

Source: CFRA’s First Bridge ETF Database, as of Nov. 30, 2020

LQD traded at a 5.0% discount to net asset value (NAV) on March 12, as concerns about COVID-19 heated up, before recovering to a 5.1% premium to NAV on March 25, days after the Federal Reserve announced plans to purchase ETFs directly to promote stability of the financial system.

Yet for 69% of the days in the first quarter of 2020, and every day thus far in the second half of 2020, the fund traded within 50 basis points of its NAV, which confirms that buyers and sellers typically traded near fair value.

In the first 11 months of 2020, fixed income ETFs gathered 33% of the industry’s net inflows. This is a larger share than the category’s 20% slice of the ETF asset base, which remains dominated by equities (76% of assets). Year-to-date, equity ETFs pulled in 59% of the cash haul, while other categories including commodities also punched their weight.

Investors favored corporate bond exposure over lower-risk Treasury & government in 2020.

More than 80% of fixed income ETFs assets are classified by CFRA as Corporate—LQD is an example; Treasury & Government—such as the iShares 7-10 Year Treasury Bond ETF (IEF); or Broad Market—like the Vanguard Total Bond Market ETF (BND). The last category combines primarily investment-grade corporate and a range of government bonds.

However, thus far in 2020, corporate bond funds gathered a 43% share of the net inflows, higher than its 30% share of the market, while Treasury & Government funds pulled in just 6% of the new money, far below their 19% slice of the total assets. IEF incurred $3 billion of net outflows.

Chart 2: Fixed Income Subcategory Breakdown

Source: CFRA’s First Bridge ETF Database, as of Nov. 30, 2020

While LQD gathered $18 billion in the first 11 months of 2020, other corporate bond ETFs, including the iShares iBoxx USD High Yield Corporate Bond ETF (HYG), SPDR Bloomberg Barclays High Yield Bond ETF (JNK), Vanguard Intermediate-Term Corporate Bond ETF (VCIT), and Van Eck Vectors Fallen Angel High Yield Bond (ANGL) were also popular.

The $62 billion that went into broad market funds was equal to a 33% share of the broader fixed income category, consistent with its 34% share of the asset base. CFRA includes index-based ETFs such as BND and actively managed fixed income ETFs such as the PIMCO Enhanced Short-Maturity ETF (MINT) in the Broad Market subcategory.

Meanwhile, in Chart 2 above, we group ETFs tied to convertibles, mortgages, municipals and other investment styles as Other, which represented 18% of net inflows.

Investors gained more comfort in actively managed ETFs in 2020.

While 97% of ETF assets are tracking an index, such as the S&P 500 or the Bloomberg Barclays Aggregate, active ETF demand increased thus far in 2020.Year-to-date through November, active ETFs pulled in 7% of industry new money, with $40 billion into active fixed income funds (13% of the record fixed income flows) that are run by a discretionary management team from BlackRock, DoubleLine (subadvisor for State Street Global Advisor), J.P. Morgan, PIMCO or another firm.  

Meanwhile, the most popular active ETF in 2020 was the actively managed ARK Innovation ETF (ARKK), which pulled in $6.4 billion year-to-date through November, making it the 18th most popular U.S.-listed ETF. ARKK’s total return more than doubled—driving its assets under management to $13 billion.

The number of active ETFs has also skyrocketed in 2020, providing investors more choices.

While ARKK launched in 2014 and MINT in 2009, established and new entrants sought to expand their ETF presence with active funds. Through November, asset managers launched 135 actively managed ETFs, equal to almost as many as those launched in 2018 and 2019 combined (150) with the new offering count having climbed sharply from 2016 when 36 still-standing products came to market.

In 2020, some firms have launched active ETFs like ARKK and MINT that fully disclose their equity and fixed income holdings, such as the BlackRock Future Innovators ETF (BFTR), Dimensional US Core Equity Market ETF (DFAU), and Janus Henderson AAA CLO ETF (JAAA). In somewhat surprising news, Dimensional Funds also announced in November plans to covert six other mutual funds into ETFs in 2021, porting over potentially $25 billion of assets to the ETF industry.

Chart 3: Actively Managed ETF Launches Since 2016

Source: CFRA’s First Bridge ETF Database, as of Nov. 2020; excludes products that have already closed.

Other firms expanded or initially launched their defined outcome ETF suite, including the Innovator S&P 500 Buffer ETF (BJAN) and TrueShares Structured Outcome ETF - October (OCTZ). These funds actively use options to provide downside protection and yet obtain upside to the equity market.

A third group of ETFs, which we refer to as semitransparent, owns stocks directly but provides delayed disclosure to investors about what is inside.

Many of these are managed by the same portfolio teams that run popular active mutual funds, including the Fidelity Blue Chip Growth ETF (FBCG) and T. Rowe Price Dividend Growth ETF (TDVG), but these are not new share classes. Five firms have launched a combined 15 semitransparent ETFs. Outside of starting capital, these funds gathered $550 million of net inflows as of the end of November, led by $145 million into the American Century Focused Dynamic Growth ETF (FDG).

We expect more semitransparent ETFs to come to market in 2021, providing a tail wind for the overall active ETF universe and allowing investors who favor the liquidity and tax efficiency of ETFs access to new strategies.   

Conclusion

While the ETF market remains dominated by index-based equity products, such as the SPDR S&P 500 ETF Trust (SPY), fixed income and actively managed products have been gaining market share.

As such, more firms are seeking to bring their expertise from the mutual fund world to the ETF market. We think the future is bright for the ETF industry, and will watch if the trends from 2020 persist in the new year.

All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of the analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. For more information and disclosures, please refer to CFRA's Legal Notice at https://www.cfraresearch.com/legal/.