It was a brutal first five months of 2022 for bond investments, with the Bloomberg Aggregate Bond Index down 9%. Advisors have long built asset allocation strategies with a healthy dose of fixed income exposure. Historically, bonds provided total return through income and stability even when equities decline in value. However, 2022 has been different due partly to recent and likely pending interest rate hikes by the Federal Reserve that caused many bonds to decline in value.
With the losses, there has been money in motion within the asset management space. Year-to-date through May 25 (latest available), bond mutual funds incurred significant redemptions, totaling an estimated $242 billion based on Investment Company Institute (ICI) data. While bond mutual fund outflows accelerated to more than $90 billion in May, bond ETFs pulled in $34 billion of new money over the whole month, more than the category gathered in the first four months of the year, according to FactSet data.
Indeed, while there are only two bond ETFs among the 10 most popular for the year, there were five bond ETFs among the 10 highest industry-wide net inflows in May. The iShares National Muni Bond ETF (MUB) led the charge last month with $3.9 billion of net inflows, followed by the Vanguard Short-Term Bond ETF (BSV) and the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL). While BSV and BIL incur minimal risk, investors also shifted $2 billion-plus in new money into the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the iShares 20+ Year Treasury ETF (TLT), which sport higher yields in exchange for taking on more credit or interest rate risk.
Domestic equity mutual funds have been bleeding assets for years as advisors and end-investors moved toward equity ETFs, yet bond mutual fund investors traditionally were more loyal. There are likely several long-term drivers of this trend, including a generational shift, growing adoption of bond ETFs by advisors and institutional investors, tax-loss harvesting, and a preference to pay lower fees establishing when losses are being incurred.
According to Morningstar, the average intermediate core bond fund declined 9.0% in the first five months of 2022, essentially in line with the losses incurred by the iShares Core Aggregate Bond ETF (AGG) and the Vanguard Total Bond Index ETF (BND). Returns were similarly poor for bond mutual funds that incur additional credit risk; the average core plus bond fund fell 8.9%.
Although most bond mutual funds are actively managed and most bond ETFs track an index, in recent years asset managers have launched a variety of actively managed bond ETFs. In 2022, the Capital Group Core Plus Income ETF (CGCP), the Fidelity Total Bond ETF (FBND), and the JPMorgan Core Plus Bond ETF (JCPB) are some of the active core or core-plus with net inflows.
As losses are likely to pile up this year for bond mutual funds, we expect more advisors and end clients to shift allocations toward ETFs.
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