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Behind Rise of Smart Beta Bond ETFs

There has been a steady shift in fixed income ETF launches in the last few months. The tactics of plain-vanilla bond ETFs do not seem to be working anymore and issuers are focusing more and more on active and smart-beta bond ETFs.

And why not? Since the financial crisis almost a decade ago, tendencies of central banks of the developed world appear to be changing. Though many of these are still practicing heightened accommodative polices and quantitative easing, the U.S. is doing the opposite.

Japan and the Euro zone are still following easy money policies just because these started QE later than the U.S. and if the economic momentum holds ground for longer, sooner or later we will likely see the unwinding of Euro zone and Japanese QE. This is because years of such practice have now put the global economy on a decent ground, inflationary expectations have been rising and bond yields have been on an uptrend.

Plus, the inflationary outlook in the U.S. got a boost since when Donald Trump won the election. Trump's proposed $1 trillion spending plan and expected slash in personal and corporate taxes injected fresh optimism in the otherwise decent U.S. inflation (read: 5 Top-Ranked Sector ETFs Thankful to Trump).

Inside the Growing Popularity of Smart-Beta Bond ETFs

As per an article published on Financial Times, “less than a decade ago, Morningstar, a data provider, had only registered two “non-traditional” bond ETFs with assets of about $200m, managed by Invesco’s PowerShares” while Morningstar now tracks 23 non-traditional bond ETFs, with total assets of about $10 billion.

The article went on to elaborate that BlackRock has totaled 25 smart beta bond ETFs, and Rob Nestor –  head of BlackRock’s US iShares smart beta team – indicated that 25 additional have been filed and are eyeing approval.

As per xtf.com, there are close to 290 fixed-income ETFs with an aggregate market cap of about $490 billion. Among them, about 65 funds are actively managed and about 31 ETFs follow an enhanced strategy. But lately there has been a surge of fixed income ETFs with smart and innovative strategies.

As said above, the bond market is in doldrums. Signs of a great rotation or a shift from bonds to stocks is palpable. The popular bond ETF iShares 20+ Year Treasury Bond ETF TLT has lost about 5.8% in the last one year (as of June 5, 2017).

Though expectations of an end to the bond bull market seem to be overstated, the plain vanilla fixed-income segment is expected to remain subdued over the long run on rising rate prospects. As a result, issuers are turning smart in their product launches (read: Why Are Active Fixed Income ETFs Flushing the Market?).

Some New Smart or Active Bond ETFs

Hartford Corporate Bond ETFHCOR, First Trust TCW Opportunistic Fxd Inc ETF FIXD and JPMorgan Global Bond Opportunities ETF JPGB are active funds having entered the market this year. IQ S&P High Yield Low Volatility Bond ETF HYLV is an example of smart-beta bond ETF that entered the market in February. 

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ISHARS-20+YTB (TLT): ETF Research Reports
FT-TCW OPP FI (FIXD): ETF Research Reports
JPM-GL BOND OPP (JPGB): ETF Research Reports
IQ-SP HY LV BD (HYLV): ETF Research Reports
HARTFD-CP BOND (HCOR): ETF Research Reports
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