With bond mutual funds experiencing record losses this year, many investors are headed for the exit. But most are not leaving fixed income altogether, they’re just swapping mutual funds for ETFs. The main reason is taxes. Many investors are selling positions in bond funds and putting the cash into similar ETFs to harvest tax losses. According to The Wall Street Journal, “This year is shaping up to be the biggest 'wrapper swap' on record.” About $454 billion has been pulled from bond mutual funds, while $157 billion has flowed into bond ETFs through the end of October. According to macro research firm Strategas, it would be the largest net annual swap to ETFs by a wide margin.” Todd Sohn, ETF strategist at Strategas stated, “The Fed is at its most aggressive in 40 years. Along with inflation, that has absolutely crushed bonds. It’s set off the acceleration of wrapper swapping that we have seen in equities for a while. Now we’re finally getting it in bonds.” Many of these swappers are also taking their money out of mutual funds that hold riskier bonds and putting them into safer Treasury ETFs.

Finsum:With the bond market experiencing its worst year since 1975, bond investors are trading mutual funds for ETFs at a record pace.