US bond ETFS attract record $25.4bn inflows in June
Global growth and trade worries send investors hunting for safety
Fixed income exchange traded funds in the US have attracted $25.4bn in June, the biggest monthly inflows on record, as investors pile into bonds amid an uncertain growth outlook.
The record take for US bond ETFs surpassed the previous monthly milestone set in October 2014 by 45 per cent and brings the annual net inflows for fixed income ETFs to $73.5bn, according to Bloomberg data.
Investors have turned to bond funds to reduce risk as doubts over the health of the global economy dominated markets in June. China and the US have failed to strike a trade deal, and central banks around the world have shifted toward more dovish monetary policy in the face of growth concerns.
“Investors are looking to bonds to mitigate equity risk,” said Matthew Bartolini, head of Americas research for SPDR, State Street Global Advisors’ ETF business. “Weak economic data presents a tangible risk to the market as we go into the summer, when there will be fewer traders in front of their trading screens — that means the summer is going to be an important period.”
A slowing growth outlook in the US has led the Federal Reserve to change tack after raising rates four times last year. Fed fund futures have now priced in a 76 per cent chance that interest rates will drop by 25 basis points when the central bank’s committee charged with setting rates meets in July.
“The economic environment has been driven by the Fed’s increasingly dovish stance — that is driving these inflows,” said Stephen Laipply, head of the US fixed income strategy for iShares, BlackRock’s ETF business. The fund manager represents around half of the global fixed income ETF market, which hit $1tn in assets earlier this year.
The inflows also reflect the rising use of ETFs by investors to buy and sell bonds. The exchange-traded vehicle typically bundles hundreds of bonds together with the promise of greater liquidity compared to trading bonds individually.
“We think fixed income ETFs will hit $2tn within five years as you continue to see institutional investors adopt these products to manage risk,” Mr Laipply said.
Government bond ETFs have proven most popular this year. The iShares 7-10 year Treasury bond ETF has attracted $5.5bn this year, the largest total for an individual bond ETF, followed by the iShares 20+ year Treasury bond ETF with $4.5bn and the Vanguard total international bond ETF with $4.5bn.
Some analysts said the June flows also reflect the push away from active portfolios towards cheaper, index-tracking funds, such as ETFs. Passive investing is closely associated with the equity market where funds follow common indices like the S&P 500, but a series of new products aiming to entice fixed income investors to use ETFs have helped draw inflows.
“It’s enormous,” said Dave Nadig, managing director at ETF.com, speaking of the June record. “Every time we get a pullback like we had in the fourth quarter, the same thing happens — money comes out of active funds and flows into ETFs.”