There are some pitfalls with the fixed income ETF market. For instance, the underlying assets are less liquid in the bond market, versus the ETF equity market. PIMCO is often willing to take cash creations or redemptions of its funds, rather than ETF holders having to go through an authorized participant to help them cash in shares or get new ones issued. [Total Bond Market ETFs]
Also, fixed income ETFs are not fully self-replicating like an equity ETF. Bond indexes often have thousands of issues in them, so in tracking an index, an ETF might only hold half the number of issues in the index, sometimes as few as 3%.
These minor drawbacks have not stopped investors from parking capital in bond ETFs for the time being. The fixed income ETF market has become a safety net in this current market as investors seek havens to stash their cash.
As the S&P 500 fell 6.3% in May, the Vanguard Total Bond Market Fund (NYSEArca: BND) gathered $1.23 billion in new assets. The iShares Barclays 1-3 Year Treasury Bond Fund (NYSEArca: SHY) took in $1.15 billion in assets. Those two funds alone accounted for about a third of May’s $7.46 billion in total flows into U.S. Bond ETFs, reports Chris Gay for US News. [ETF Spotlight: BND]
Vanguard Total Bond Market Fund
Tisha Guerrero contributed to this article.