Amid increased regulatory scrutiny and tight supply in some corners of the fixed income market, institutional investors have not been shy about allocating billions of dollars to bond exchanged traded funds.
While U.S. stocks have been, for the most part impressive this year, inflows to bond ETFs have impressed as well. No ETF has hauled in more new assets than the almost $5.9 billion added by the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF). The ProShares Ultra 7-10 Year Treasury (NYSEArca: UST) and the iShares Core Total U.S. Aggregate Bond ETF (NYSEArca: AGG) also rank among the top-10 ETFs for 2014 inflows. [Nifty Leveraged Treasury ETFs]
The impact of institutional money on corporate bond ETFs is noticeable as well. “Wall Street banks are holding fewer corporate bonds these days than they did before the 2008 financial crisis, the result of pressure from global regulators to take less risk. Primary corporate bond dealers are holding only $57 billion in individual bonds compared with $250 billion pre-crisis, according to the Federal Reserve Bank of New York,” Reuters reports.
Nearly all of the business done in the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG), the largest junk bond ETF, has been by institutions, according to Reuters.
Though just one anecdote, that level of institutional activity indicates some institutions prefer to use ETFs when accessing less liquid corners of the bond market, such as high-yield and emerging markets. Institutional use of bond ETFs is expected to continue rising.
According to a Greenwich Associates survey released earlier this year, one in five non-ETF users plan to invest in fixed-income related ETFs in the coming year. About two-thirds of existing users increased their usage since 2011. [Institutions Increase Use of Bond ETFs]