When you work in the ETF industry you learn to follow the flows. But when I say that, I’m not only referring to the dollar amounts that are going in and out of funds.
I’m also referring to the idea that you can gauge investor sentiment and their comfort level in using ETFs to express those sentiments by following the flows.
One area where this is clearly playing out is in the fixed income space. As I wrote in my last blog post, we think the fixed income ETF market has the potential to grow to $2 trillion in the next 10 years.
From late 2008 through June of this year assets in global fixed income exchange traded products (ETPs) nearly tripled – jumping from $104 billion to $303 billion. In the first half of this year, bond ETPs accounted for 40% of fund flows, helping to propel ETPs to their strongest first half inflows in history.
Skeptics of this trend have attributed the popularity of fixed income ETFs to low interest rates, and they contend that once rates rise, investors will flee fixed income funds.
At face value, those skeptics might seem to have a point. After all, short-term investors often follow the momentum of the market and can quickly shift from a risk off to a risk on trading mentality based on the latest headlines, economic report or Fed meeting.
But the numbers – the actual fixed income fund flows — tell a different story about investor behavior.
Take a look at this graph: