Investors have poured more money into US fixed income exchange traded funds so far this year than for the whole of 2015, as the hunt for returns intensifies with nearly $13tn of global bond yields trades below zero.
US fixed income ETFs have attracted more than $60bn of money this year — outstripping 2015, when the funds lured just under this year’s current total, according to data provided by Deutsche Bank.
International investors seeking fixed rates of return via bonds are targeting the higher yields on US government and corporate debt via fixed income ETFs, which track bonds and trade like a stock price on an exchange.
“With five months to go we are already at record inflows for the whole year,” said Sebastian Mercado, an ETF strategist at Deutsche Bank.
Large bond ETFs like the iShares Core US aggregate bond fund, which gives exposure to US investment grade debt, have outstripped inflows to larger equity ETFs. The fund has seen $8.7bn of inflows so far this year, lifting its assets above $40bn, according to Bloomberg data.
Recent US corporate bond sales have often been several times oversubscribed — including offerings from Microsoft, Verizon and Unilever — driving prices higher and preventing fund managers from buying as much of the issue as they sought.
ETFs have also been bolstered by concerns over diminishing “liquidity” in secondary bond markets as fund managers complain that they have been unable to buy and sell large quantities of corporate paper without significantly affecting prices.
“What you are witnessing in quick shifting markets, at times when asset allocation, portfolio construction and the ability to pivot quickly from view to view . . . is the ETF becoming the utility investors simply can’t live without,” said Martin Small, head of BlackRock’s US iShares.
While fixed income ETF’s are attracting money, equity ETFs globally have seen an 85 per cent drop in inflows this year, raising just $15bn according to data from ETFGI.
That trend, however, has begun to turn since the UK voted to leave the EU, as investors brace for further stimulus, bolstering the performance of equities. On Thursday, the S&P 500, Nasdaq Composite and Dow Jones Industrial Average closed at record levels, the first time the three have done so on the same day since 1999. European equity bourses this week reclaimed levels not touched since the Brexit vote, with outflows from the region moderating in the last week.
Data provider EPFR noted that in the last week, $6bn flowed into equity mutual funds and ETFs, the second highest level of the year. Flows to Japanese equity funds hit a 28-week high, driven largely by new money to a dozen ETFs in the week to August 10.
Despite a strengthening of the Japanese yen to 101.91 per US dollar, which weighs on the country’s exports, equities in Japan have gained favour for their relatively high dividend yield. The Topix now trades with a dividend yield above that on the S&P 500.
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