A lot is happening in the fixed income space this year. Bond yields throughout the developed world are depressed. Here in the U.S, advisors, and investors are fretting about the Federal Reserve tapering asset purchases and the possibility that the central bank’s rate hike will be accelerated.
Now, there’s concern 10-year Treasury yields will rise again. Things are so ominous that former bond king Bill Gross said this week bonds are “trash.”
Add it all up, and fixed income investors may do well to consider active management in this space. That is a relevant consideration as inflows to fixed income exchange traded funds remain stout.
In August, “bond ETFs notched another sound month of flows, pulling in about $19.4 billion of new investment. As their equity counterparts have made headlines, bond ETFs have quietly and consistently amassed strong flows of their own,” writes Morningstar analyst Ryan Jackson. “Their monthly haul has ranged from $17 billion to $20 billion in each of the past five months. At their current rate, bond ETFs are on pace to narrowly eclipse the annual flows record they set in 2020.”
Investors opting for active bond funds are being rewarded this year. In the first half of 2021, active managers across nearly all fixed income segments – emerging markets bonds were the exception – beat benchmarks, while a far lower percentage of active equity managers accomplished that objective.
With rate hike fears lingering and inflation growing in intensity, investors allocate to some predictable destinations among bond ETFs.
“While the Fed has maintained that recent inflation is transitory and rate hikes remain in the distant future, fixed-income ETF investors appear skeptical,” adds Jackson. “Following a lucrative August, inflation-protected bond ETFs have now pulled in more than $10 billion over the past three months. Shorter-term bond ETFs have drawn in more money than longer-term options, which are subject to greater interest-rate risk. The U.S. intermediate- and short-term bond categories have each absorbed over $24 billion for the year to date, while the U.S long-term bond category has added only $400 million.”
Investors that like the marriage of active management and bonds could soon get more options. For example, T. Rowe Price in June filed plans for three bond ETFs: The T. Rowe Price Total Return ETF, T. Rowe Price QM U.S. Bond ETF, and T. Rowe Price Ultra-Short Term Bond ETF.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.