ETF Investors Start Year Piling Into Bonds

In the first week of 2015, ETF investors trimmed their exposure to U.S. equities, taking out more than $9.6 billion from the asset class, and piled almost $1.7 billion into broad-based bond funds looking for the safety of fixed income in a world that's struggling to forge growth.

The U.S. economy is expanding, but elsewhere, the eurozone is facing its first year-on-year negative inflation reading, putting it in deflationary territory. As the European Central Bank prepares to embark on a bond-buying stint in an effort to spur the region's economic growth, Greece might again be in line to exit the eurozone if an anti-austerity government comes to power there.

Net outflows were more than $9 billion in the week ended Thursday, Jan. 8, pulling total U.S.-listed ETF assets to just below $2 trillion, according to data compiled by ETF.com. The weekly outflows followed a record-shattering 2014, when total inflows in the entire year were a bit shy of $250 billion.

On another front, depressed oil prices have started to show their negative impact on producers and have been weighing on energy stocks, even if lower gasoline prices bode well for consumer spending. In the past six months, energy stocks in the S&P 500 have declined more than 22 percent as WTI crude oil slipped to 5 ½-year lows, below $50 a barrel.

In a way, the demand for U.S. bonds, specifically, has been evident this year, with yields on 10-year Treasurys plunging below 1.95 percent earlier in the week. Funds like the iShares 20+ Year Treasury Bond ETF (TLT | A-83) and the PIMCO 25+ Year Zero Coupon U.S. Treasury ETF (ZROZ | C-57) have rallied sharply in recent days as investors bet on the perceived safety of long-dated U.S. debt amid growing concerns about the global economy.

The appeal of U.S. fixed income goes beyond safety. From an income perspective, U.S. sovereign bonds are still shelling out attractive yields—even at current levels—relative to foreign debt such as German bonds, which are at record-low yields, and Japanese debt.

From a flows perspective, investors poured $386 million into the iShares Core U.S. Aggregate Bond ETF (AGG | A-98) in the week ended Thursday, Jan. 8. About 37 percent of the fund is tied to U.S. Treasurys. The Vanguard Total Bond Market ETF (BND | A-94), which allocates about 40 percent to U.S. Treasurys, raked in $373 million in the same period.

These are the biggest and broadest fixed-income ETFs out there, and in 2014, they were among the most popular, each raking in more than $7 billion in fresh net assets in 12 months.

What has not been very popular so far this new year is U.S. equities. The SPDR S&P 500 ETF (SPY | A-99) bled $9.19 billion in assets in the past five days, while the PowerShares QQQ (QQQ | A-48) and the iShares Russell 2000 ETF (IWM | A-86) saw $2.0 billion and $1.2 billion in asset outflows in the period, respectively. 

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