Bond ETFs: Beware of a Bubble | ETF Trends

Shaken by the financial debacle of 2008, jumpy investors turned to bonds and related exchange traded funds (ETFs) to safeguard what was left of their wealth. The problem with this scenario is that investors aren’t letting go of bonds, despite the changing investment atmosphere.

The Federal Reserve opted to leave interest rates unchanged for now, so the risk is low at this point. But as the economic recovery continues along, the risk that rates will rise is a very real one and if you’re holding bonds, you need to understand the impact that this will have.

Even after a rally going in stocks, investors are still clutching firmly to bond funds, writes Eileen Ambrose for The Baltimore Sun. Most market experts expect interest rates to start going up in the second half when the economy shows more signs of recovery, and the outcome won’t be favorable for bond holders. [How to spot and avoid ETF bubbles.]

Between January and November last year, net inflows into bonds hit $349 billion, $27 billion more than in 2008, while stocks saw outflows of $4.1 billion in the first 11 months on top of the $234 billion outflow from stocks the year before. [Bond ETFs: Good times coming to an end?]