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Portfolio > Economy & Markets > Fixed Income

Fixed Income ETFs Take Center Stage

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As U.S. equity ETFs face outflows, fixed income ETFs are the investment of choice. They attracted $15.3 billion in inflows in April, the second highest monthly inflows ever recorded — only the $17 billion record in October 2014 was greater — while equity ETFs attracted $10 billion following two straight months of outflows, according to State Street Global Advisors.

This was the third consecutive month that fixed income inflows outpaced equity inflows, and active bond ETFs accounted for almost two-thirds of bond inflows. While investors weren’t avoiding risk necessarily, they appear to be trying to temper it. In addition, they favored government and investment-grade bonds over all other fixed income funds.

Government bond ETFs attracted $6.7 billion in inflows while investment-grade corporate bond ETFs attracted $3.2 billion. Ultra-short-term fixed income ETFs were the most popular among maturity levels, which makes sense given the steady rise in both short-term and long-term rates since the beginning of the year.

Long-term bond ETFs with maturities above 10 years, however, also attracted inflows, of $1.7 billion despite rising rates and the 10-Year Treasury yield breaking above 3% in late April (before retreating slightly).

“This may point to investors believing that the 3% breakthrough may not hold,” wrote Matthew Bartolini, head of SPDR Americas Research at State Street in the April report.

Even high-yield bond ETFs saw inflows in April, breaking a record-setting five months of outflows. Preferred debt and emerging market bonds were the only fixed income categories with outflows in April, and preferred and high-yield debt were the only two debt categories posting outflows year to date.

Among equity ETFs, large-cap ETFs attracted the biggest inflows in April — $5.65 billion versus $1.7 billion into small caps — but not enough to offset outflows in previous months, which in total are down $237 billion. Flows into U.S. stock ETFs were substantially higher than flows into international ETFs in developed markets ($3.4 billion) and emerging markets ($2.6 billion).

Despite the popularity of fixed income ETFs in April and outflows from equity ETFs earlier this year, year-to-date data show that equity inflows, at $56.9 billion, were almost twice as much as fixed income ETF inflows, at $31.6 billion.

First S&P Bond Index ETF Launched

ProShares has introduced the first S&P 500 bond index ETF. The S&P 500/MarketAxess Investment Grade Corporate Bond Index (SPXB) ETF is essentially a cheaper iteration of Ivy ProShares S&P 500 Bond Index Fund, whose expense ratio ranges from 34 to 65 basis points depending on the share class.

SPXB charges just 15 basis points, but that’s three times the expense ratio of the iShares Core U.S. Aggregate Bond ETF (AGG), a long-term investment-grade bond ETF that holds more than 6,700 bonds. The ProShares S&P 500 bond ETF, also a long-term bond fund, can invest in up to 1,000 of the most liquid, high-quality U.S. investment-grade corporate bonds with maturities of 2-1/2 years or higher at issuance or a face value of at least $750 million.

Issues that meet the criteria are ranked by liquidity, as measured by their 60-day trading average volume reported by TRACE (Trade Reporting and Compliance Engine) data so that the most frequently traded, high-quality bonds can be chosen. SPXB currently has a weighted average maturity of about 10 years, a duration of about 7 years and a yield to maturity of 3.9%.

Michael Sapir, the CEO of ProShares, said the new bond ETF should appeal to advisors and individual investors interested in moving from actively managed bond funds to an index ETF that invests in quality, liquid bonds from companies that investors are comfortable with. Among the ETF’s holdings are bonds from JPMorgan Chase, Apple, Microsoft and many other household names.

Sapir described the new ETF as a buy and hold investment. Its value, however, will decline if long-term rates continue to rise. A 1% increase in rates, for example, would reduce its value by about 7%, given its duration.

Bernice Napach is the senior writer with You can reach her at [email protected].


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