Mixed Risk About Bond ETFs

April 30, 2019

Bond ETF Demand Trends

Flight to quality and safety in the form of longer-dated Treasury ETFs is only one place where investor demand is picking up.

The other place, perhaps surprisingly, is in corporate bond ETFs.

The iShares iBoxx USD Investment Grade Corporate Bond ETF (LQD) has taken in $1.3 billion year-to-date; and junk bond funds SPDR Bloomberg Barclays High Yield Bond ETF (JNK) and the iShares iBoxx USD High Yield Corporate Bond ETF (HYG) have seen net creations of $2.4 billion and $2.9 billion, respectively. These funds were all underperformers and net asset losers in 2018, but are now delivering solid gains and seeing strong asset growth.

The irony here is that bond investors are concerned about weak economic growth ahead, but are clearly unconcerned about companies’ ability to service their debt. They are bullish on corporate debt and on low default rates, pushing credit spreads over Treasuries down. 

 

Charts courtesy of StockCharts.com

 

Bond ETFs See Demand

So far, 2019 has been a great year for U.S. equities, but it has also been good for defensive assets such as bonds. Investors may be playing both sides given the mixed bag of what is (strong economy) and what may be (weaker growth ahead), but it all translates into massive asset flows in fixed income ETFs as an asset class.

Year-to-date, investors have poured some $36 billion into U.S.-listed fixed income ETFs, roughly half of all assets flowing into the ETF market this year, and more than the $25 billion in net creations seen in bond ETFs by this time last year.

 

Contact Cinthia Murphy at [email protected]

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