Room for Growth in ETF Bond Market

Ten-year Treasury yields have tumbled 25% this year, a decline that has stoked billions of dollars of inflows to fixed income exchange traded funds.

On a year-to-date basis, three bond ETFs – the Vanguard Total Bond Market ETF (NYSEArca: BND), iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG) and the iShares Barclays 1-3 Year Treasury Bond Fund (NYSEArca: SHY)rank among the top-10 ETFs for new assets added. That trio has combined to add $15 billion in new assets. [Investors Flock to Bond ETFs]

Even with impressive asset gains for those ETFs and others, the bond ETFs still represent a small percentage of the overall U.S. ETF market, but that is changing. U.S. fixed income ETF assets under management currently reside at $270 billion, according to BlackRock data, a figure that has risen nearly five-fold since 2008.

“Despite significant growth over the last decade, the ETF market remains small when compared to the cash bond and mutual fund markets. However, we believe assets in fixed income ETFs could reach $2 trillion globally over the next decade,” says BlackRock.

The trend of inflows to bond ETFs is not new in 2014. Through the first five months of the year, fixed-income ETFs attracted 54% of all exchange traded product inflows. Additionally, institutional investors have increasingly turned to bond ETFs during times of market tumult. When U.S. equity market volatility spiked in late September and into the early part of this month, bond ETF inflows surged.

Between Sept. 26 and Oct. 8, U.S. bond ETFs added $9.1 billion in new assets, according to BlackRock data. ETFs issued by BlackRock’s iShares unit, the world’s largest ETF sponsor, took in $6.2 billion of that $9.1 billion. [Bond ETFs Bulk Up

Other bond ETFs, both new and old, are benefiting from investors’ affinity for fixed income ETFs. The iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) has added $1.9 billion in new assets this year whle theiShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) has tacked on nearly $2.4 billion.

Falling Treasury yields have been a boon for ETFs with exposure to the long end of the yield curve. For example, TLT is up 20% this year, more than double the gain posted by the S&P 500. However, investors have not been shy about preparing for the possibility of an interest rate hike next year by the Federal Reserve as highlighted by the inflows to shorter duration ETFs.