Morningstar, Inc., a leading provider of independent investment research, recently reported estimated U.S. mutual fund and exchange-traded fund (ETF) fund flows for May 2019. Overall, passive U.S. equity funds saw $2.7 billion in outflows while active U.S. equity funds lost $12.9 billion to outflows in May–$15.6 billion combined.

With additional funds reporting assets after the April fund flows report published, Morningstar data shows about $89.0 billion between active and passive U.S. equity funds reaching parity. Morningstar estimates net flow for mutual funds by computing the change in assets not explained by the performance of the fund, and net flow for U.S. ETFs shares outstanding and reported net assets.

Morningstar’s report about U.S. fund flows for May is available here. Highlights from the report include:

  • Fund flows were weak across the board in May, with long-term funds losing nearly $2.0 billion to outflows, the worst month year-to-date as investors cut risk. Money-market funds saw inflows of $82.0 billion, the group’s second-best month in 10 years.
  • Among category groups, taxable-bond inflows fell from $42.6 billion in April to $15.4 billion in May, the group’s worst showing year-to-date. Overall, credit-oriented high-yield bond and bank loan funds fared worst, losing $5.8 billion and $3.1 billion to outflows, respectively.
  • Among all U.S. fund families, Vanguard led with $16.7 billion in inflows, followed by $5.1 billion from Fidelity; iShares’ flows were flat. At the other end of the spectrum, State Street Global Advisors saw $22.6 billion in outflows, followed by Invesco’s $5.8 billion in outflows.
  • Invesco QQQ Trust, which holds a Morningstar Analyst Rating™ of Neutral, saw outflows of $3.3 billion in May. Conversely, active-oriented American Funds had $2.7 billion in inflows, with much of that demand coming through its target-date lineup.

To view the complete report, please click here.

A volatile May no doubt elicited a risk-off sentiment that permeated throughout the capital markets, causing high-yield bond funds to experience record outflows. Furthermore, with bond market mavens warning investors of headwinds in the fixed income space like the possibility of inverted yield curve, rising rates and BBB debt sliding out of investment-grade, investors need to be keen on where to look for opportunities to hide away when markets head downward.

Risk-Off Fixed Income ETF Plays

One place is in investment grade debt and here are three ETFs to consider.

  1. iShares 1-3 Year Credit Bond ETF (NASDAQ: CSJ): CSJ tracks the investment results of the Bloomberg Barclays U.S. 1-3 Year Credit Bond Index where 90 percent of its assets will be allocated towards a mix of investment-grade corporate debt and sovereign, supranational, local authority, and non-U.S. agency bonds that are U.S. dollar-denominated and have a remaining maturity of greater than one year and less than or equal to three years–this shorter duration is beneficial during recessionary environments.
  2. iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD): LQD seeks to track the investment results of the Markit iBoxx® USD Liquid Investment Grade Index composed of U.S. dollar-denominated, investment-grade corporate bonds. LQD allocates 95 percent of its total assets in investment-grade corporate bonds to mitigate credit risk.
  3. ProShares Investment Grade—Interest Rate Hedged (BATS: IGHG): IGHG tracks the performance of the Citi Corporate Investment Grade (Treasury Rate-Hedged) Index with long positions in investment grade corporate bonds issued by both U.S. and foreign domiciled companies. This is particularly important during market downturns when the propensity for a company to default on its debt is higher. As such, IGHG focuses on investment-grade issues to reduce credit risk.

For more trends in fixed income, visit the Fixed Income Channel.

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