During a volatile October month, traders headed for the entrance to bond exchange-traded funds (ETFs) just as often as they headed for the exits.
In particular, trader volume soared the most in the iShares Core US Aggregate Bond ETF (NYSEArca: AGG), which saw $2.6 billion in withdrawals or 5% assets under management. Next, the iBoxx $ Invmt Grade Corp Bd ETF (NYSEArca: LQD) experienced an outflux of 6% of its assets under management.
While traders headed for the exit signs in those ETFs, certain funds like the Vanguard Total Bond Market ETF (NasdaqGM: BND) saw traders come in through the front door with inflows–a sign that when volatility is roiling the stock market, investors are seeking refuge in bond ETFs.
“Record trading volumes during October’s bout of market volatility shows how fixed income investors are increasingly utilizing bond ETFs to manage risk. The volumes also show that bond ETFs have been a positive force for stability, adding liquidity and price transparency in high velocity markets,” according to a BlackRock note.
Short and Simple in a Complex Bond Market
The month of October wasn’t only a signal to stock investors that due diligence is necessary when screening for quality U.S. equities that can be resilient during times of volatility, but it also put fixed-income investors on notice that the same strategy is necessary for the bond market. One emerging theme that rose out of the volatile October was a need for more short duration exposure as external headwinds face fixed-income markets going forward.
A combination of rising interest rates, a healthy injection of government debt into the markets and other external factors has made for a more complex bond market. If the sell-offs in October portend that the decade-long bull run is over, then the environment for fixed-income investors will only get more perplexing.
“New cross-currents created by historic injections of central bank liquidity – as well as by demographics, technology, and regulation – have made it more complex,” an article in Institutional Investor noted. “A transition is under way as monetary policy normalizes, liquidity ebbs, and bouts of volatility are roiling the market. The implications for fixed income investors are significant.”