This year’s flows to exchange traded funds indicate investors are favoring domestic large-cap stocks and U.S. government debt. That could be a sign risk appetite is limited.
“U.S. ETF investors have added more than $205 billion in net new assets this year (through September 28), most of it in large-cap U.S. stocks and Treasury bonds,” said BlackRock in a recent note. “(Treasury purchases have largely been “barbelled,” allocated to short- and long-term maturities.) Emerging market stock ETFs, which had gathered $42 billion in 2017, have taken in about $11 billion; the bulk of flows have gone to broad indexes and to China. In fixed income, high yield saw more than $4 billion in outflows, compared with $4 billion added during the previous year.”
Skittish fixed income investors looking to maintain solid income profiles can consider short-term, investment-grade corporate bond ETFs, such as the iShares 0-5 Year Investment Grade Corporate Bond ETF (NasdaqGM: SLQD).
Given the shifting fixed-income environment as the Federal Reserve embarks on raising interest rates, bond investors should consider ETFs that track short-term corporate bond with a focus on higher quality.
SLQD ETF Details
The $1.37 billion SLQD, which soon turns five years old, “seeks to track the investment results of an index composed of U.S. dollar-denominated, investment-grade corporate bonds with remaining maturities of less than five years,” according to iShares.
The ETF holds nearly 1,300 bonds and has an effective duration of just 2.30 years. SLQD’s 30-day SEC yield is 3.32%.
Related: A Smart Beta Treasury Inflation-Protected Securities ETF
Investment-grade corporate debt is typically less volatile than the the equity market. Over the past three years, total return volatility for U.S. investment grade corporate bonds was roughly 3.4%, compared to the total return volatility near 10% for U.S. stocks.
“As the Federal Reserve notches up its policy rate, some investors have been turning to short-maturity bonds: 2-year Treasury yields have offered a similar yield to the 10-year, with substantially lower interest rate risk. For incremental yield potential, think about short-term investment grade credit: the iShares 0-5 Year Investment Grade Corporate Bond ETF (SLQD), has a 30-day SEC yield of 3.3% (as of 9/28), compared with 2.8% for the 2-year Treasury and 3.1% for the 10 year,” according to BlackRock.
For more information on the fixed-income market, visit our bond ETFs category.