As some grow wary of risks in the equity market, investors are shifting their attention to corporate bonds and related exchange traded funds.
According to Lipper data, investors yanked $46.2 billion from stock funds last month, the biggest monthly outflow this year, while adding $13.5 billion to taxable bond portfolios, the Wall Street Journal reports.
While markets roiled, investors are shifting to the relative stability of bonds, further pushing down yields in the debt markets. For instance, the yield spread investors demanded to hold junk-rated company debt over safe U.S. government bonds narrowed to 3.85 percentage points recently, its low level since July and below this year’s average, according to Bloomberg data. The narrowing spread was also a sign that fixed-income investors didn’t expect a slowdown to push these companies into default.
Corporate bond ETFs have attracted hefty inflows this year. For example, the Vanguard Intermediate-Term Corporate Bond ETF (NYSEArca: VCIT) attracted $4.2 billion in net inflows year-to-date while the Vanguard Short-Term Corporate Bond ETF (NYSEArca: VCSH) brought in $3.4 billion, iShares iBoxx $ High Yield Corporate Bond ETF (HYG) saw $2.7 billion in inflows and iShares IBoxx $ Investment Grade Corporate Bond ETF (LQD) added $2.5 billion, according to ETFdb data.
Among the most popular plays over the past week, VCIT saw $651 million in net inflows, SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) attracted $457 million and SPDR Portfolio Short Term Corp Bond ETF (NYSEArca: SPSB) added $370 million.
“It really is the worldview of growth being sluggish but not necessarily negative,” Brian Jacobsen, a senior investment strategist at Wells Fargo Asset Management, told the WSJ who is also advising clients to make the shift. “Even with the trade drama, even with Brexit, those geopolitical issues aren’t going to compromise corporate credit.”
Many investors have turned more risk-off as President Donald Trump unexpectedly escalated the U.S.-China trade war, manufacturing sector data revealed a slowdown for the first time in years, and job creation declined for two consecutive months.
Consequently, investors were moving into corporate debt, arguing that they were balancing risk exposure through different assets. Corporate bonds generate more attractive yields than the sub-2% payout on most Treasuries and offer upside potential if the economy surprises the market.
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