Todd Rosenbluth, head of research at VettaFi, recently appeared on TD Ameritrade to discuss the movement of investors into fixed-income ETFs with host Caroline Woods.
Last week saw record trading of $58 billion in fixed-income ETFs, primarily in the secondary market between stock sellers and purchasers.
“We saw record demand for trading for corporate bond ETFs; we saw it particularly strong in the high yield bond ETF marketplace,” explained Rosenbluth
ETFs that saw particularly high levels of trading included the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) at $9 billion of trades, the SPDR Bloomberg High Yield Bond ETF (JNK) at $4 billion of trades, and the iShares Broad USD High Yield Corporate Bond ETF (USHY) at $2.2 billion, six times its daily average.
“Investors are running to fixed income ETFs as opposed to fleeing them. Some of that is the trading activity but it’s a sign that there’s greater liquidity in the fixed income ETF market than investors perhaps realized,” Rosenbluth said.
The high yield funds tend to be less sensitive to interest rates compared to Treasuries, but do carry significantly higher amounts of credit risks. With that being said, funds like HYG that are down this year — HYG is down 14.9% YTD — have still performed better than the broader market.
Within bonds, advisors and investors are generally investing along two different strategies in the current environment; they are either seeking ultra-short duration bonds that are less interest-rate sensitive while seeking to protect the downside in their portfolios, or else they are seeking return potential within the higher yield offerings.
A record $58 billion traded in bond ETFs in anticipation of last week’s rate hike 😲💸
— TD Ameritrade Network (@TDANetwork) June 22, 2022
It’s a trend that doesn’t carry over into equities, Rosenbluth explained.
“In the equity space, we’ve really seen it more of the quality aspect of it and we think investors have been rewarded by favoring higher quality strategies,” Rosenbluth said.
That includes within energy with funds like the Alerian MLP ETF (AMLP) as well as in more diversified strategies within equities.
The pivot to fixed income ETFs has been at the cost of mutual funds, as fixed income mutual funds have experienced outflows this year. It doesn’t come as a surprise to Rosenbluth, because in an environment where performance is down, hefty fees can make losses even more substantial. The price savings that ETFs offer in their reduced fees are a good incentive for advisors and investors looking to trim costs, particularly in a downward environment.
“We did a webcast earlier this week with our VettaFi advisor audience base and they’re looking to stay within income but looking to rotate perhaps into more equity-oriented strategies — I mentioned AMLP earlier — there’s some quality ETFs like QUAL (iShares MSCI USA Quality Factor ETF) or COWZ (Pacer US Cash Cows 100 ETF) that have been seeing strong interest,” Rosenbluth explained.
Covered call strategies have also been more popular, with funds like the JPMorgan Equity Premium Income ETF (JEPI).
In this environment there are “lots of different ways to get exposure to income and tilt your portfolio away from just pure fixed income, and have some exposure to equities as well,” Rosenbluth said.
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