Investors Show Bond ETFs Love

More than $66 billion has flowed into fixed-income ETFs this year despite rising interest rates.

sumit
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Senior ETF Analyst
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Reviewed by: Sumit Roy
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Edited by: Sumit Roy

Interest rates are climbing, sending fixed-income investors running for the hills. That’s the conclusion you might draw from glancing at October’s flows data, which showed fixed-income ETFs registering their first monthly outflow in three years.

That outflow, totaling $5 billion, came as the benchmark U.S. 10-year Treasury yield jumped to a seven-year high close to 3.26%.

But that’s not the whole story.

Looking at just last month’s flows data paints a bleak picture for fixed-income ETFs this year. But looking at the data for the year as a whole reveals a much more positive situation for the segment.

Year-to-date, through the end of October, a sizable $66.2 billion flowed into fixed-income ETFs—including $56 billion into U.S. fixed-income funds and $10.2 billion into international fixed-income funds—equal to more than 30% of all inflows for U.S.-listed ETFs in 2018.

The haul is even more impressive when considered against the backdrop of a big jump in interest rates to multiyear highs.

Embracing Higher Yields

The data suggest that, rather than running away from higher interest rates, investors are embracing them. Funds holding short-term debt, in particular, have seen their assets balloon.

The iShares Short Treasury Bond ETF (SHV), which holds Treasuries with maturities of one year or less, has nearly doubled its assets this year, taking in a whopping $7.6 billion of new money.

The iShares 1-3 Year Treasury Bond ETF (SHY), the iShares Floating Rate Bond ETF (FLOT), the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL), the JPMorgan Ultra-Short Income ETF (JPST) and the PIMCO Enhanced Short Maturity Active ETF (MINT) have also seen tremendous success this year, with inflows of more than $3 billion each.
 

TickerFundYTD Inflows ($M)AUM ($)
SHViShares Short Treasury Bond ETF7,57715,592
FLOTiShares Floating Rate Bond ETF5,21811,832
EMBiShares JP Morgan USD Emerging Markets Bond ETF3,80014,744
SHYiShares 1-3 Year Treasury Bond ETF3,48514,699
BILSPDR Bloomberg Barclays 1-3 Month T-Bill ETF3,3495,302
JPSTJPMorgan Ultra-Short Income ETF3,2023,317
SCHPSchwab US TIPS ETF3,1835,859
MINTPIMCO Enhanced Short Maturity Active ETF3,15511,200
BNDXVanguard Total International Bond ETF2,93312,101
FLRNSPDR Bloomberg Barclays Investment Grade Floating Rate ETF2,8324,501
VMBSVanguard Mortgage-Backed Securities ETF2,5087,134
NEARiShares Short Maturity Bond ETF2,0674,944
AGGiShares Core U.S. Aggregate Bond ETF2,00552,688
SCHRSchwab Intermediate-Term US Treasury ETF1,8422,953
BSVVanguard Short-Term Bond ETF1,74625,302

Note: Data measures inflows for the year-to-date period through 10/31/18.

 

By holding short-term debt (or floating-rate bonds, in the case of FLOT), these ETFs minimize interest rate risk, while still allowing investors to capture this year’s higher interest rates. That’s resonated with investors who want to take advantage of the rising rate environment without worrying about whether rates move even higher from here.

Other Factors At Play

In addition to being attracted to higher yields, investors may be parking their cash in short-term bond ETFs for safety. Let’s face it: It’s been a volatile year for the stock market, with three 8% corrections in the S&P 500 in just 10 months.

Short-term bond ETFs are a haven amid this volatility, especially as the outlook for long-term bonds is more uncertain.

Another factor driving demand for these ETFs: the reforms in money market funds that took place two years ago. Beginning in October 2016, the Securities and Exchange Commission said that certain money market funds—mutual funds that hold short-term debt securities—would no longer be allowed to have stable $1 net asset values (NAVs) and would have to convert to floating NAVs based on market prices.

The SEC also said that during times of stress and low liquidity, money market funds would have the ability to charge redemptions fees and temporarily block investors from taking their money out.

Together, these changes to money market funds made them more secure and better able to withstand a financial crisis, but at the expense of some of their coveted features. That may be pushing some former money market fund investors into short-term bond ETFs.

Not Just Short-Term Bonds

While short-term bond ETFs are this year’s biggest flows winners, other fixed-income ETFs are seeing interest too.

Some long-duration bond ETFs—those most sensitive to interest rate movements—are gaining assets. The iShares 20+ Year Treasury Bond ETF (TLT) had inflows of $1.5 billion through the first 10 months of the year.

At the same time, investors are using the distress in emerging markets to pick up bonds in those regions. The iShares JP Morgan USD Emerging Markets Bond ETF (EMB) had inflows of $3.8 billion in the year-to-date period through October, as prices for the fund tumbled to the lowest level since early 2016.

The Schwab U.S. TIPS ETF (SCHP), which holds Treasury inflation-protected securities, has also thrived this year, with inflows of $3.2 billion. With U.S. wages rising at their fastest pace in nine years in October, some investors may be viewing TIPS as a good way to protect against unanticipated inflation.

Corporate Bond ETFs Shunned

As widespread as the interest in fixed-income ETFs has been this year, not all of them are feeling the love. Corporate bond ETFs like the iShares iBoxx USD High Yield Corporate Bond ETF (HYG), the SPDR Bloomberg Barclays High Yield Bond ETF (JNK) and the iShares iBoxx USD Investment Grade Corporate Bond ETF (LQD) have been absolutely shunned.

The trio has outflows of a combined $13 billion already this year, as jittery investors worry about potential defaults when the next economic downturn hits. Just as the stock investors have turned skittish on the back of trade, interest rate and late-cycle worries, so too have corporate bond investors.

 

TickerFundYTD Outflows ($M)AUM ($)
LQDiShares iBoxx $ Investment Grade Corporate Bond ETF-5,20431,254
JNKSPDR Bloomberg Barclays High Yield Bond ETF-4,7937,433
HYGiShares iBoxx $ High Yield Corporate Bond ETF-3,03414,135
BIVVanguard Intermediate-Term Bond ETF-2,15112,511
IGIBiShares Intermediate-Term Corporate Bond ETF-1,7895,673
PFFiShares U.S. Preferred Stock ETF-1,65615,205
BKLNInvesco Senior Loan ETF-1,2596,631
IGSBiShares Short-Term Corporate Bond ETF-1,16310,195
SJNKSPDR Bloomberg Barclays Short Term High Yield Bond ETF-1,1533,156
PCYInvesco Emerging Markets Sovereign Debt ETF-8373,713

Note: Data measures outflows for the year-to-date period through 10/31/18.

Email Sumit Roy at [email protected] or follow him on Twitter umitroy2

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.