In a world filled with easing liquidity and depressed rates, investors funneled billions into fixed-income exchange traded funds to capitalize on central bank action and squeeze out more yields.
Globally, yield-hungry investors threw $124 billion into bond ETFs so far this year, reports Rochelle Toplensky for the Financial Times.
Among the most popular U.S.-listed ETFs of 2016, the iShares Core U.S. Aggregate Bond ETF (AGG) saw $7.7 billion in net inflows, iShares iBoxx $ Investment Grade Corporate Bond (LQD) attracted $6.0 billion, Vanguard Total Bond Market ETF (NYSEArca: BND) added $3.1 billion and iShares TIPS Bond ETF (NYSEArca: TIP) saw $3.1 billion in inflows, according to ETF.com.
“EPFR Global-tracked Bond Funds took in over $9bn for the second week running as investors responded to predictions of a rate hike-free remainder of 2016 in the US and fresh monetary tailwinds for emerging markets,” EPFR told FT.
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The ongoing uncertainty in a post-Brexit world means that interest rates are expected to remain lower for longer, which could push investors to safer sovereign debt and further support the fixed-income market. The sudden influx in demand this year has dragged yields on trillions of dollars in global debt into the negative as well.
Long-term U.S. corporate debt is also setting new records, with a net $123 billion invested in U.S. bond ETFs year-to-date.
“Yields have been very low,” Paul Malloy at Vanguard told FT. “Between European Central Bank QE and rumours of the Bank of England QE, as long as there is that kind of support in the market, fixed income is still a place where investors will move to.”
[related_stories]Assets in bond ETFs, though, remain disproportionate to the underlying markets – bond ETFs make up less than 1% of the $94 trillion global debt market and only a quarter of the $2.6 trillion found in stock ETFs. BlackRock, though, argues that fixed-income funds are hitting a tipping point as the money manager projects bond ETF assets could expand to $2 trillion by 2025 as more accept the investment vehicle.
“Structurally, we are seeing a shift in adoption of using bond ETFs within portfolios, particularly institutional investors, asset managers and hedge funds,” Stephen Cohen, head of fixed income beta at BlackRock, told FT.
Related: Corporate Bond ETFs Hit Record Volumes in June
Due to the underlying bond market’s notoriously illiquid nature, especially after banks, the traditional intermediary, cut inventories in face of increased regulations, large buyers and institutions have turned to more liquid bond ETFs as an alternative.
“Fixed income investors are becoming more comfortable with ETFs and [more are]using ETFs as a fixed income tool within their portfolios,” Cohen added.