International fixed-income ETFs have burned up the leaderboard year-to-date, drawing the second-highest level of net inflows by percentage of assets under management (AUM), behind inverse ETFs.
As of March 19, $6.9 billion has flowed into international bond ETFs year-to-date. Total investment dollars into the asset class have risen 9.4%, up to $74.1 billion (read: "Whopping $37B Flows Into ETFs").
However, only two ETFs accounted for 75% of these flows: the Vanguard Total International Bond ETF (BNDX) and the iShares JP Morgan USD Emerging Markets Bond ETF (EMB). BNDX brought in $2.9 billion of new net money year-to-date, while EMB brought in $2.2 billion.
|International Bond ETFs With Highest Net Inflows, YTD|
|Ticker||Fund Name||AUM||Expense Ratio||3-Mo TR||YTD Flows (M)|
|BNDX||Vanguard Total International Bond ETF||$16.00B||0.09%||2.71%||$2,947.66|
|EMB||iShares JP Morgan USD Emerging Markets Bond ETF||$17.07B||0.40%||6.38%||$2,246.48|
|EMLC||VanEck Vectors J.P. Morgan EM Local Currency Bond ETF||$5.42B||0.30%||4.51%||$731.46|
|IAGG||iShares Core International Aggregate Bond ETF||$1.19B||0.09%||2.76%||$167.32|
|LEMB||iShares J.P. Morgan EM Local Currency Bond ETF||$547.81M||0.30%||4.13%||$125.01|
|EBND||SPDR Bloomberg Barclays Emerging Markets Local Bond ETF||$747.48M||0.40%||3.94%||$122.35|
|GSY||Invesco Ultra Short Duration ETF||$2.16B||0.25%||0.97%||$116.10|
|LDUR||PIMCO Enhanced Low Duration Active ETF||$290.31M||0.60%||1.69%||$97.31|
|BOND||PIMCO Active Bond ETF||$2.10B||0.61%||3.32%||$92.70|
|FIXD||First Trust TCW Opportunistic Fixed Income ETF||$511.19M||0.55%||2.72%||$91.95|
Source: ETF.com; date range: 1/1/2019 – 3/18/2019
Emerging Market Debt Hot
To some extent, those flows aren't too surprising, as EMB and BNDX are also the two largest international fixed-income ETFs, at $17.1 billion and $16.0 billion in AUM, respectively.
However, in the case of EMB, strong performance is also likely driving some of the flows. Emerging market debt has rallied on the back of a falling U.S. dollar. When the greenback falls, global debt denominated in local currency tends to benefit.
Of all the international bond ETFs, EMB is the third-best-performing, rising 6.6% over a three-month period. That's second only to the $184 million First Trust SSI Strategic Convertible Securities ETF (FCVT) and the $3.5 billion Invesco Emerging Markets Sovereign Debt ETF (PCY), which have risen 7.1% and 6.9%, respectively.
Lured by these high returns, investors have begun to pivot back to emerging market debt. In fact, four of the top six international bond ETFs with the highest inflows year-to-date have been emerging market funds. The $5.4 billion VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (EMLC) and the $1.2 billion iShares J.P. Morgan EM Local Currency Bond ETF (LEMB) have also seen strong year-to-date inflows: $731 million and $125 million, respectively.
BNDX: Broad Liquid Exposure
As for Vanguard Total International Bond ETF (BNDX), the particular motivation behind the inflows is less likely a result of the emerging markets rally. The fund allocates only 4% to emerging markets. The bulk of its portfolio is in Europe (57%) and the Pacific (26%), mainly Japan and Korea.
However, with an expense ratio of 0.09%, BNDX is tied for the cheapest international bond ETF, making it a natural choice for a cost-conscious investor looking to diversify their fixed-income allocation to overseas debt.
BNDX's main competitor, the $1.2 billion iShares Core International Aggregate Bond ETF (IAGG), also costs 0.09%. But whereas BNDX brought in $2.9 billion year-to-date, IAGG has only netted $167 million.
That could be due to BNDX's massive liquidity, which gives it a trading boost. BNDX trades $148 million worth of average volume daily, compared with IAGG's $9 million in volume. BNDX also has a lower average spread of 0.02%, compared with IAGG's 0.03%.
But the flows may also have something to do with IAGG's heavily optimized portfolio. Though the two ETFs track similar indexes, IAGG holds about 2,500 names, compared with BNDX's 5,400. That means a less diverse portfolio, and one that can sometimes result in higher tracking differences to its index, especially in times of market stress.
Contact Lara Crigger at [email protected]