Displaying items by tag: ETFs

Last week, over $10.2 billion went into U.S.-listed ETFs, with the majority going into fixed-income funds. Bond ETFs pulled in $4.5 billion according to ETF.com data. This followed the previous week’s $7.8 billion in inflows that went into bond funds. In the first week in January, fixed-income products pulled in $9.4 billion, a jump from $1.5 billion in the last week of December. Investors are flocking to fixed-income exchange-traded funds as recession warnings ring louder. Investors are jumping from stocks to bonds as they are often seen as a safer investment during economic downturns. Earlier in the month, Bloomberg News reported that Wall Street firms are sounding the alarm for a recession in 2023. BlackRock’s Investment Institute stated that “a recession is foretold,” while Barclays is predicting “one of the weakest years for the world economy in 40 years.” This also comes after multiple Fed officials have predicted interest rates remain elevated for the foreseeable future. Federal Reserve Bank of San Francisco President Mary Daly said in a streamed interview with the Wall Street Journal a couple of weeks ago that “I think something above 5[.0%] is absolutely, in my judgment, going to be likely.” Her comments come a week after Minneapolis Fed President Neel Kashkari stated that the “central bank’s so-called terminal rate could reach as high as 5.4% before easing,” in a post on Medium.

Finsum:As Wall Street firms sound the alarm on a potential recession, investors are flocking to fixed-income ETFs, which are seen as safer investments during economic downturns.

Blackrock expanded its fixed-income ETF lineup with the launch of the BlackRock AAA CLO ETF (CLOA). The fund, which was launched on January 10th, seeks to provide capital preservation and current income by investing principally in a portfolio composed of U.S. dollar-denominated AAA-rated collateralized loan obligations (CLOs). According to Investopedia, a CLO is a bundle of loans that are ranked below investment grade. While the underlying loans are rated below investment grade, most CLO tranches are typically rated investment grade due to credit enhancements and diversification. CLOs have historically only been available to institutional investors, but Janus Henderson launched the first CLO fund in an ETF wrapper in October 2020. That fund, the Janus Henderson AAA CLO ETF (JAAA) was clearly able to find an audience since the fund currently has close to $2 billion in assets under management. This bodes well for CLOA, which has an expense ratio of 0.20%, six basis points cheaper than JAAA. Investors have been attracted to CLOs due to low volatility, low downgrade risk, and low correlations with traditional fixed-income assets. CLOA currently has a weighted average coupon of 5.40 and a weighted average maturity of 4.24 years.

Finsum: Blackrock launched an AAA CLO ETF to take advantage of investor CLO interest due to low volatility, low downgrade risk, and low correlations with traditional fixed income.

Corporate executives are warning that the volatile market, combined with the Fed’s rate hikes and the war in Ukraine will negatively impact fourth-quarter earnings, while analysts have downgraded earnings expectations in every sector. However, there may be a bright spot during earnings season, ETF issuers. According to ETF.com data, ETF flows came in at $203 billion in the fourth quarter, nearly double the third quarter's flows of $105 billion. The increase in flows should help fourth-quarter earnings for ETF issuers. It would also be a reversal from the previous quarter when State Street reported $14 billion in net outflows and Schwab’s ETF revenue declined sharply. ETF inflows at BlackRock’s iShares also fell by more than half compared with the third quarter of last year. The surge in inflows during the fourth quarter can be attributed to the rising demand for fixed-income ETFs. Investors are flocking to bond ETFs as they are considered safe havens during downturns. BlackRock President Rob Kapito said on the company’s third-quarter earnings call, “We're going to see dramatic and large inflows into fixed income over the next year as interest rates rise.” ETF.com data shows that fixed-income funds saw inflows of $61 billion in the fourth quarter, up nearly 13% from the $54 billion in the prior-year quarter.  

Finsum:While analysts are predicting a dismal fourth-quarter earnings season, ETF issuers may be a bright spot as fixed-income funds saw inflows of $61 billion during the quarter.

Warnings are piling up for high-yield bonds. The asset class could take a big hit if the Fed’s rate hikes push the U.S. economy into a recession, sparking rating downgrades and defaults. But that hasn’t stopped investors from piling into junk bond ETFs. In fact, of the nearly $11 billion that flooded into fixed-income ETFs over the past week, $1.6 billion flowed into the iShares iBoxx High Yield Corporate Bond ETF (HYG), the most of any fund, according to Bloomberg data. It’s difficult for investors to resist yields near the highest levels of the past decade according to CreditSights. Zachary Griffiths, a senior fixed-income strategist with CreditSights, said the following on Bloomberg Television, “Yields look too good to be short. The potential for returns in the 12% area makes high-yield an attractive place to be and we’re also more optimistic on the economic front, which is very important for our call.” With money flowing into high yield and other corporate credit, demand is falling for cash-like short-term bond ETFs. For example, more than $860 million flowed out of the iShares 0-3 Month Treasury Bond ETF (SGOV) in the past week, after $6.6 billion flowed into the fund last year.

Finsum:With yields on high-yield bonds near a ten-year high, it’s difficult for investors to resist junk bond ETFs, even with warnings piling up.

While rising interest rates last year battered both stocks and bonds, the rise in rates brought higher yields to the fixed-income market. According to Dow Jones Market Data, the yield on the 10-year Treasury note rose 2.330 percentage points in 2022 to 3.826%, its largest annual gain on record. The two-year Treasury yields surged 3.669 percentage points to 4.399%, while the 30-year yield jumped 2.046 percentage points to end the year at 3.934%. These marked the largest annual increases ever for those notes. The jump in yields drove investors into fixed-income ETFs last year, with BlackRock's iShares dominating inflows. In a phone interview with Morningstar, Salim Ramji, BlackRock's global head of iShares and index investments, stated "We had record flows even in one of the worst fixed-income markets. We were twice the next competitor." Based on data from Morningstar Direct, iShares attracted around $100 billion in 2022, the most among U.S.-listed ETFs that invest in fixed income. Vanguard saw the second biggest fixed-income ETF inflows with around $49 billion, followed by State Street with about $21 billion. The most popular fixed-income ETF based on inflows last year was the iShares 20+ Year Treasury Bond ETF (TLT), which gathered around $15 billion.

Finsum: In an ugly year for fixed-income markets, bond ETFs continued to see strong inflows due to higher yields with Blackrock’s iShares leading the pack.