Fixed Income ETFs Soar so Far in September

AGG has received $1.3 billion in net inflows so far this month.

September is a little more than a week old, but the asset flows into exchange traded funds suggest investors are betting big on a Fed interest rate cut, which means leaning into the fixed income space.

A snapshot of ETF flows by Eric Balchunas of Bloomberg Intelligence shows bond ETFs as the only category with net inflows since the start of the month.

The $119 billion iShares Core U.S. Aggregate Bond ETF (AGG) has received $1.3 billion worth of inflows so far this month. And the $116 billion Vanguard Total Bond Market ETF (BND) has generated more than $700 million over the same period, according to etf.com fund flow tracking data.

The inflows into bonds are coinciding with a rough start to the month for equities, including a 4% drop by the S&P 500 Index last week.

“September historically has been a tougher month for equities, and with the election coming more into focus, it now seems as though there has been some profit-taking in equities given their strong run up over the last few weeks,” said Stephen Kolano, chief investment officer at Integrated Partners in Waltham, Mass.

“With the likelihood of interest rate cuts and inflation coming down, there does seem to be some flow moving into fixed income to take advantage of some still decent yields plus a better chance of capital appreciation should rates come down,” he added.

Fixed Income ETFs Soaking Up Assets

But the new thirst for fixed income likely has more to do with the Federal Reserve than a reaction to market volatility, according to Tim Holsworth, president of AHP Financial in Midland, Mich.

“It’s probably no great mystery here, as pending lower rates from the Fed could make bonds appreciate,” he said. “But given that stocks are entering the typical rocky fall trading sessions, it might be a flight to safety as well.”

Steve Laipply, global co-head of fixed income ETFs at Blackrock Inc., also sees a combination of factors driving the recent asset flows into fixed income ETFs.

“You’re seeing bonds returning to a more traditional role of diversification to riskier assets, and investors are moving money into fixed income as we have reached the end of this tightening cycle,” he said. “But there are also structural trends happening, including the broader use of ETFs by institutional investors.”

Laipply said it is usually best to be ahead of the Fed when it comes to interest rate adjustments.

“Long-term interest rates, in theory, have already priced in the anticipated cuts,” he said.

The Fed’s current overnight rate is around 5.33%, which is projected to be cut by 100 basis points this year and another 150 basis points next year, Laipply said.

“Moving into bonds now, you are locking in what is already believed to be baked into the Fed cycle, and there’s no harm in that if you share that view," he said. “Maybe the Fed will have to do more cutting, and you want to be positioned for that.”

UPDATE (Sept. 9, 5:15 p.m.): Adds to final Laipply quote.