5 Most Popular Fixed Income ETFs

So far this year, bond ETFs have attracted the lion’s share of investor assets, and some funds are standing out.

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy
Here’s a surprising statistic: 83% of all net creations in U.S.-listed ETFs so far this year have been in fixed-income funds. That’s more than $8 out of every $10 flowing into ETFs.

Year-to-date, investors have poured some $41 billion into ETFs, $34 billion of which have landed in bond funds—that’s a record pace for the segment. U.S. equity funds, by comparison, have raked in a net of $2 billion so far in 2016.

Some say this demand reflects a generally defensive mood among investors, who have preferred less-risky assets in recent months amid concerns about slowing global growth, and what that means to the already-compressed rates. The U.S. saw first-quarter GDP hit 0.5%, its slowest rate of growth in two years.

January’s Correction Still Haunts

January’s stock market correction, when the SPDR S&P 500 (SPY | A-97) dropped nearly 5%, helped fuel investor fears, and has kept many still on edge, looking for safety. This year’s impressive demand for gold speaks to that, but that’s another story.

Greenwich Associates also attributed the increasing demand of bond ETFs to growing institutional use. In a report released recently, it found that “bond ETFs are taking on an increasingly vital role in institutional portfolios as regulations have forced global bond dealers to reduce their inventories and market-making activities, sapping liquidity from the market.”

“Over the past 12 months, institutions’ need for liquidity has been a primary driver of fixed-income ETF demand,” the study said. “More than half the institutions in the study that have experienced liquidity problems say these issues have had a direct impact on their investment processes. While institutions of all types have struggled with reduced liquidity in bond markets, ETFs have not suffered the same fate. Since 2008, bond ETF liquidity has grown more than four and a half times or at an annual growth rate of 33%.”

A Little Bit Of Everything

There hasn’t been one particular segment of fixed-income ETFs that seems to be standing out when it comes to investor preference this year.

A look at the five most popular fixed-income ETFs year-to-date shows diverse appetite for bond strategies with varying amounts of risk and income.

1. The iShares Core U.S. Aggregate Bond ETF (AGG | A-98) has seen net inflows of $4.30 billion year-to-date.

The fund is this year’s most popular bond strategy. AGG serves up broad exposure to U.S. investment-grade bonds. The market-weighted index includes Treasurys, agencies, CMBs, ABSs and investment-grade corporates.

The ETF, which is massively liquid-trading more than $320 million on average a day, is also incredibly cheap, with an expense ratio of 0.08%—$8 per $10,000 invested. AGG is the largest bond ETF in the market today, with $36 billion in assets.

2. The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD | A-77) has seen net inflows of $3.30 billion year-to-date.

LQD is another investment-grade product that’s raking in assets at a fast pace this year. The fund tracks a market-weighted index of U.S. corporate investment-grade bonds across the maturity spectrum. It, too, is massively liquid, trading more than $441 million on average a day.

While it is investment grade, LQD does offer both interest rate and credit risk, because the fund tilts toward bonds with at least three years to maturity, making its portfolio more concentrated on medium- to long-term bonds.

LQD costs 0.15% in expense ratio, and has $29 billion in assets under management.

3. The SPDR Barclays High Yield Bond ETF (JNK | C-68) has seen net inflows of $2.63 billion year-to-date.

JNK is a junk bond fund tracking a market-weighted index of highly liquid, high-yield U.S. dollar-denominated corporate bonds, the bulk of which are in the industrial sector.

The portfolio offers attractive yields at a time when rates everywhere are compressed. JNK’s current 30-day yield is 6.83% for a portfolio with modified adjusted duration—or a measure of its sensitivity to interest rates—of 4.4 years.

The $12.5 billion ETF costs 0.40% in expense ratio, or $40 per $10,000 invested—that’s less than its leading competitor.

4. The iShares TIPS Bond ETF (TIP | A-99) has seen net inflows of $2.55 billion year-to-date.

In January, the likes of Bill Gross of Janus were calling investors to own inflation-protected Treasurys as a way to bet on higher inflation associated with demographic challenges the U.S. faces.

It seems investors listened, and TIP landed as one of the most sought-after bond ETFs this year.

TIP tracks a market-value-weighted index of U.S. Treasury inflation-protected securities with at least one year remaining in maturity. The broadly diversified portfolio with duration of 7.9 years has a 30-day yield of 1.26%.

The fund has grown to $17.7 billion in total assets, and costs 0.20% in expense ratio—or $20 per $10,000 invested.

5. The iShares iBoxx $ High Yield Corporate Bond ETF (HYG | B-68) has seen net inflows of $2.50 billion year-to-date.

HYG has been the largest and most popular junk bond ETF in the market for years. The $16 billion fund, which came to market in 2007, trades just over $1 billion on average a day. The broad portfolio comprising almost 1,000 securities has a current 30-day yield of 6.58% and duration of 4.02 years.

Its largest sector allocation by market value is to communications at about 25%, followed by consumer staples and consumer discretionary.

HYG is more expensive than its main competitor, JNK, with a 0.50% expense ratio.

Charts courtesy of StockCharts.com

Contact Cinthia Murphy at [email protected].

Cinthia Murphy is head of digital experience, advocating for the user in all that etf.com does. She previously served as managing editor and writer for etf.com, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.