As the second quarter of 2019 comes to a close, fixed income exchange-trade products (ETPs) got much attention, especially during a volatile May as U.S.-China trade deal negotiations stalled. The more question marks in the current state of the capital markets, the better for fixed income as record inflows could be ahead as uncertainty surrounds the outlook for the global economy.

According to a Bloomberg story, the year-to-date inflows through early this week showed that fixed-income ETFs pulled in about $72 billion of net new capital from investors, and assets in debt strategies now equal a record $741 billion.

As the U.S.-China trade deal that was supposed to happen went south, investors increased their exposure to fixed income to a point where it reached a six-year high during the month of May as negotiations unraveled, according to the latest AAII Asset Allocation Survey.

As such, other notable trends included a decreased exposure to equities and an increase of investors sitting on the sidelines with cash.

Other highlights:

  • Allocations to stocks and associated funds declined 2.0 percentage points to 65.8 percent
  • Equity allocations remain above their historical average of 61.0 percent for the 74th consecutive month
  • Bond and bond fund allocations rose 1.8 percentage points to 18.9 percent
  • Fixed-income allocations were last higher in April 2013 (19.7 percent)
  • May was the fourth time in five months with bond and bond fund allocations above their historical average of 16.0 percent

This latest data could provide insight on a repeat performance of fixed income’s first quarter. It’s no doubt that the volatility-laden fourth quarter of 2018 spurred an investor move to bonds, but that trend persisted in the first quarter of 2019 with $34.5 billion going into fixed income exchange-traded funds (ETFs), according to a US-Listed Flash Flows Report from State Street Global Advisors.

Here were the top performers in Q2:

1. iPath US Treasury 5-year Bull ETN (DFVL)–up 19.5 percent: The iPath® US Treasury 5-year Bull ETN is designed to provide investors with exposure to the Barclays 5Y US Treasury Futures Targeted Exposure Index.  The ETNs are unsecured debt obligations of the issuer, Barclays Bank PLC, and are not, either directly or indirectly, an obligation of or guaranteed by any third party.  Any payment to be made on the ETNs, including any payment at maturity or upon redemption, depends on the ability of Barclays Bank PLC to satisfy its obligations as they come due.  An investment in the ETNs involves significant risks, including possible loss of principal, and may not be suitable for all investors.

2. iPath US Treasury 2-year Bull Exchange Traded Note (DTUL)–up 18..4 percent: The iPath® US Treasury 2-year Bull ETN is designed to provide investors with exposure to the Barclays 2Y US Treasury Futures Targeted Exposure Index™. The ETNs are unsecured debt obligations of the issuer, Barclays Bank PLC, and are not, either directly or indirectly, an obligation of or guaranteed by any third party.  Any payment to be made on the ETNs, including any payment at maturity or upon redemption, depends on the ability of Barclays Bank PLC to satisfy its obligations as they come due.  An investment in the ETNs involves significant risks, including possible loss of principal, and may not be suitable for all investors.

3. PIMCO 25+ Year Zero Coupon US Treasury Index Fund (ZROZ)–up 6.6 percent: The PIMCO 25+ Year Zero Coupon U.S. Treasury Index Exchange-Traded Fund is an exchange-traded fund (ETF) that aims to capture the returns of The BofA Merrill Lynch Long US Treasury Principal STRIPS IndexSM. By tracking the index, the fund aims to achieve, before fees and expenses, the yield and duration exposure inherent in this index. It has a very low expense ratio of 0.15 percent.

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