Bond ETF Flows Shift To Safety

April 05, 2018

Fixed-income ETFs saw healthy inflows of $15.3 billion for the quarter in spite of a tough environment.

The most followed benchmark, the Bloomberg Barclays U.S. Aggregate Bond Index, had a loss of -1.48% for the quarter. The loss can be attributed to credit spreads widening and the rise in interest rates, coupled with market uncertainty about tariffs and tech regulations.

Yet a closer look at the flows of bond ETFs helps us identify key trends that developed during the quarter and understand how advisors used different ETF strategies to navigate this challenging time.

Active Management Popularity

While actively managed funds have struggled to find traction in other areas of the ETF market, active strategies are popular in fixed-income ETFs.

Their popularity may be due to liquidity and replication constraints in the bond market, which makes it difficult for ETFs to track a passive benchmark. Still, investors also look for managers who can provide alpha in uncertain times.

During the first quarter of the year, actively managed bond ETFs gathered a total of $3.1 billion according to FactSet data; with the iShares Short Maturity Bond ETF (NEAR) being the biggest gainer, with inflows of $619 million, with the fund’s assets under management now more than $35 billion.

Still, inflows were distributed among all fixed-income groups.


Q1 2018 Flows By Focus & Active Per SEC

Data provided by FactSet


Notably, this trend can be seen in high-yield ETFs, where actively managed funds saw inflows of $450 million versus outflows of $5.4 billion on their passive peers.

It appears investors and advisors trust managers to find opportunities where high-yield securities can compensate returns even with widening credit spreads and rising interest rates.

For the first quarter, they were rewarded as active high-yield ETFs on average outperformed their passive peers with a 1.21% total gain against a loss of 0.21% for the latter.

Duration Strategies At Play

Flows for the quarter also reveal how investors have allocated funds to counter rising interest rates.

Duration-hedged ETFs received $509 million in the first quarter. These ETFs add a short Treasury overlay to mitigate interest rate risk. The ProShares Investment Grade-Interest Rate Hedged ETF (IGHG) was the largest gainer, with $190 million inflows. Also, target-duration ETFs—funds designed to maintain a specific duration—saw inflows of $146.72 million.

Furthermore, in a rising rate environment, bond prices fall, and generally, short-duration bonds tend to experience a smaller price drop than bonds with longer duration. At the same time, the Fed raised its benchmark rate by 0.25% in March, thus making it more attractive to invest money in short-term securities.


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