ETF investors have embraced the rise in interest rates, directing $142 billion to fixed-income ETFs, constituting 41% of total inflows for U.S.-listed ETFs this year. Notably, treasury bond ETFs like the iShares 20+ Year Treasury Bond ETF and iShares 0-3 Month Treasury Bond ETF gained significantly. However, corporate bond ETFs see outflows due to perceived risk and the prospect of minimal extra returns compared to treasuries.
Tradeweb and FTSE Russell are partnering to enhance fixed-income index pricing and trading commodities. The collaboration aims to widen pricing across an extensive range of FTSE Russell administered securities. The arrangement also includes closing prices, which merge Tradeweb’s electronic platform activities to align with real trading levels. Over time, FTSE Russell intends to incorporate Tradeweb’s pricing into its fixed-income indexes.
Amidst market volatility and uncertainty, alternative income strategies have grown attractive. These include ultra-short exposures, options-based strategies, dividend enhancement, and closed-end funds. Investors validate the potential safety these alternatives could provide against interest rate hikes. Key market insiders include Garrett Paolella of NEOS and Christian Magoon of Amplify ETFs, who’ve favorably endorsed these strategies.
Mohit Gang: I will go with the Aditya Birla U.S. Treasury Fund first. It is a very, very unique idea. It is especially meant for
Amid geopolitical and policy uncertainties, advisors are preferring bond investments, as seen by Global ETFs’ 42% share of US market net inflows in early 2023. In an upcoming VettaFi Symposium, industry leaders will discuss varying aspects related to bond allocation strategies and active fund opportunities.
VettaFi is emphasizing fixed income this October with a series of webcasts and an Income Strategy Symposium. The company’s Explorer dataset indicates that interest is shifting towards U.S. corporate bonds, away from Treasury bonds. There has been strong demand for high-quality safe-haven ETFs, with increased flows to municipal bond and active ETFs. Despite substantial net outflows from high-yield ETFs, VettaFi sentiment data suggests investors are becoming more interested in corporate bonds for 2024.
Like other fixed income assets, fallen angel bonds have proven vulnerable to the recent spike in Treasury yields, but those elevated yields could signal an
J.P. Morgan Asset Management (JPMAM) has launched the JPMorgan Active Bond ETF (JBND), aiming to deliver total return from a managed portfolio of U.S. investment-grade bonds. JBND, focused on securitized debt, seeks to outperform the Bloomberg US Aggregate Bond Index in a three- to five-year market cycle. The fund joins a growing suite of active ETFs from JPMAM, which has seen rising interest and nearly $1 billion inflows to the JPMorgan Equity Premium Income ETF (JEPI) in the past month.
The iShares 10-20 Year Treasury Bond ETF (TLH) continues to be a risky duration bet amid the likelihood of a sustained higher interest rate environment and possible further hikes. The impact of higher rates, particularly on corporate earnings and restructuring efforts, will only start being substantial from 2024 onwards. TLH remains an efficient bond ETF option, but now is not the time to go long duration due to persistent inflation and a tight job market.
Bond ETFs comprise 20% of industry assets, with over 40% share of net inflows. Many advisors prefer active or mixed strategies to core bond allocation. Various benefits of passive and active core bond funds are highlighted; the former includes low costs and broad market exposure, while the latter often simplifies decision-making by outsourcing to experts. Specific ETFs and their performance are also discussed, such as Vanguard Total Bond Index ETF and iShares Core Aggregate Bond ETF.
The iShares 0-5 Year Investment Grade Corporate Bond ETF (SLQD) primarily invests in short-duration corporate bonds, limiting both credit and duration exposure. As a result, SLQD has historically generated a mere 1.6% return p.a., not sufficiently countering inflation. The ETF is deemed unfavorable for its inability to deliver robust returns under various economic conditions – economic robustness leading to inflation and raised interest rates, economic weakening leading to wider credit spreads, or a recession.
The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) has declined over 28% since late 2021 but offers an attractive yield near 6%. The fund’s portfolio consists of low default risk, investment-grade corporate bonds, which have historically outperformed U.S. treasuries. Despite being likely to decline in economic recessions, the LQD’s downturns are usually temporary, making it appealing for potential capital appreciation and interest income.
The Federal Reserve’s commitment to return inflation to its target level implies that there will be no immediate interest rate cuts, making short-term treasuries a good investment opportunity. The SPDR Bloomberg 1-3 Month T-Bill ETF is highlighted in favoring rising short-term rates. Further rate increases could pressure the equity market, presenting short-term bonds as a more desirable option than dividend stocks.
Treasury Inflation-Protected Securities (TIPS) yields have recently risen, reaching the highest rates since 2009, hinting at potential returns of 6-7% per year over the next decade. While historical and current economic factors indicate possible persisting inflation, consumer expectations and market indicators suggest tame inflation. TIPS offer diversification benefits and inflation protection in an all-weather portfolio, though future performance may be impacted by various economic scenarios, including benign inflation or deflation.
