There has been a sharp uptick in the high-value bond ETF trades in the last 12-months which most investors are attributing to activity from large institutional investors. Transactions are up as much as 36% on some platforms from the previous year. This has been part of a longer more ongoing trend that has been successful for many bond funds. Since the GFC, investors have questioned the resiliency of these funds to economic downturns, but regulators and investors alike are pleased with their performance in the covid pandemic. Just as important to this is the support from the Fed and Fiscal policy to the economy. Stepping in with bond relief has helped these ETFs. Finally, the increase in investment in bond ETFs has actually led to tighter underlying spreads in bond markets themselves and reflects better liquidity.
Finsum: Many believe that over-investment in index funds could be disruptive to equity volatility over time, but it appears to be stabilizing bond spreads.
Macro conditions have left many investors skittish regarding the future of fixed income funds, but BlackRock is firm in its belief in the future of Fixed Income ETFs. BR said that despite headwinds from rising rates and inflation they expect bond ETFs to surpass $2 trillion in the next year and a half and to hit $5 trillion by 2030. While the current environment doesn’t make investors ecstatic about the bond market future, many overlook the traditional role they fill in a portfolio: stability. That resilience especially during volatility and the ultra-low rate environment has proved useful enough for many investors.
Finsum: ETF trends have been amplified by the pandemic and will be enduring moving forward.
Most fixed income ETFs used to be linked to passive tracking products in the bond market, that is until more recently. Rules Adopted by the US SEC have steered many investors to active fixed income by making it easier to launch new active ETFs. Active funds are attractive for ETF producers because they draw higher fees (about .2 percent) than active funds. This has led to an explosion in active fixed income. Active bond fund creation is growing at nearly double the rate of the rest of the ETF market, and investors are ready as well as 2021 saw a record pace of inflows. One big factor in shifting more investors into active fixed income is aging global demographics which are still searching for yield and income.
Finsum: The world’s aging population is creating a safe asset shortage and pushing bond prices higher.
Everyone and their dog has been pivoting to ultra-short duration pseudo-cash bond ETFs in the fixed income balance of their portfolio and this is causing a sell-off of lots of corporate bond ETFs. LQD saw its fifth day of outflows which set a pandemic era record. This brought together a total of $856 million in investor outflows. This is part of a blogger trend where sentiment around investment-grade bonds is weakening. However, it's not because they are less likely to pay back but more a reflection of investment-grade corporate debt generally having a longer duration, which is the risk investors don’t want with upcoming rate hikes.
Finsum: The risk premium hasn’t changed with corporate debt just the term structure risk. Fundamentally these bonds could still be in a good place.
Investors have been wary of tech stocks as of late and instead are parking their money in investment-grade corporate bond funds. This week the sector garnered a whopping $2.9 billion in inflows which is the biggest week since July, over six months ago. Markets are expecting the Fed to hike this year, which means borrowing rates will start to hurt the growth-oriented stock, and the Nasdaq slumped to its worst start since 2008 as a result. However, the rising yields are also pushing more investors into relatively riskless corporate debt. Junk bonds didn’t get the same bump as many indices were down with a hawkish Fed.
Finsum: Don’t sell on tech stocks just yet, but it could be a bearish year for the number one market segment the last year if the Fed hikes four times!
ETFs saw a record performance in 2022 as inflows almost reached 1 trillion dollars, and while equity brought in over 60% of the inflows the second half was dominated by the fixed income market. This momentum in fixed income is expected to swell in 2022, particularly for the active ETF funds. Driving that those trending figures are the outperformance of active funds over passive funds, and an almost peak interest rate and inflation uncertainty. This sort of bourgeoning inflation and constricting Fed is unprecedented for the post-Volcker era. Active Issuers like T. Rowe price are very bullish on their prospects in the upcoming year.
FINSUM: While active funds haven’t brought home major returns they are getting better yield than passive funds and more diversity rather than piling on U.S. government securities.