Fixed income exchange traded funds are not the biggest slice of the exchange traded funds universe, but even with U.S. equities solid through much of 2014, bond funds have been prolific asset gatherers.
“While fixed-income exchange-traded products make up just 15% of industry’s asset base, they gathered 54% of the inflows during the first five months of 2014,” said S&P Capital IQ in a new research note, citing BlackRock data.
A 12.4% tumble for 10-year Treasury yields has fueled the return to bond ETFs this year. Year-to-date, three bond ETFs rank among the top-10 asset-gathering funds. The top ETF in terms of 2014 inflows is the iShares 7-10 Year Treasury Bond ETF (IEF) , which has raked in over $5.9 billion, about $100 million than has flowed into the Energy Select Sector SPDR (XLE) and the Vanguard Total Stock Market ETF (VTI) combined. [Treasury ETFs Keep Shining]
In another sign of just how bullish investors are on bonds, particularly U.S. Treasuries, the ProShares Ultra 7-10 Year Treasury (PST) , a double-leveraged ETF, is the ninth-best asset gatherer this year with new assets gained of almost $1.9 billion.
Amid a changing interest rate environment and post-financial crisis regulatory shifts are among the catalysts prompting institutional investors to increase their use of fixed income ETFs. “Meanwhile fixed-income ETFs allow investors to trade bonds like they do stocks, providing intra-day liquidity and transparency not available in mutual funds. Further, ETFs tend to be much less expensive than active mutual funds,” according to S&P Capital IQ. [Institutions Increase Use of Bond ETFs]
Although Treasury yields have tumbled this year, boosting the longer-dated bonds held by ETFs such as IEF and the iShares 20+ Year Treasury Bond ETF (TLT) , shorter duration fare has been prized by advisors and investors.
“With the Fed nearing completion of its bond-buying program and giving strong consideration to raising rates in 2015, it is no surprise that many of the more popular new ETFs have a short-term focus,” said S&P Capital IQ.
Some newer ETFs with an emphasize on low duration have proven successful out of the gate, including the iShares Short Maturity Bond ETF (NEAR) . NEAR, which debuted in September 2013, already has $278.5 million in assets under management.
Rated overweight by S&P Capital IQ, NEAR is an actively managed fund with an effective duration of just 0.88 years, according to issuer data.
The FlexShares iBoxx 3-Year Target Duration TIPS Index Fund (TDTT) is another lower duration option for investors to consider. TDTT is nearly three years old and has quietly amassed $2.1 billion in assets under management.
Rated overweight by S&P Capital IQ, TDTT tries to reflect the performance of Treasury Inflation Protection Securities with a 3-year target duration. TIPS are indexed to inflation and their value rises along with increases in inflation, as measured by the Consumer Price Index. [Demand for TIPS ETFs Rises]
FlexShares iBoxx 3-Year Target Duration TIPS Index Fund
Tom Lydon’s clients own shares of TLT.