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Why Bond ETFs Are Gaining Popularity Too

Amy Belew of BlackRock

Three Key Drivers Pushed ETFs To A Record Year (Part 2 of 5)

(Continued from Part 1)

Where Investors are focusing their Attention

In 2014, we saw three key trends emerge to put the ETF industry on track for a record year, specifically:

1. Fixed Income:

Investors flocked to fixed income ETFs, despite record-low interest rates, to the tune of $78.6 billion. This makes sense, as this category includes safe havens like Treasuries, broad U.S. fixed income and investment grade corporate debt. As the search for income continues, we’ve also seen many investors turn to high yield corporate bonds and municipals.

Market Realist – Why bond ETFs are gaining popularity.

Generally, investing in bonds directly, especially corporate bonds, is illiquid. Corporate bonds trade in decentralized over-the-counter (or OTC) markets that involve a dealer. In OTC trading, dealers act as intermediaries between buyers and sellers. However, corporate bonds are sometimes listed on exchanges, though the majority of trading volume happens OTC.

Nowadays, it is much simpler to invest in bonds via ETFs. It saves you the trouble of trading OTC and ETFs are highly liquid.

The graph above compares the fund flows for the iShares 20+ Year Treasury Bond ETF (TLT) that tracks long-dated Treasury bonds, the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) that tracks investment-grade corporate bonds, and the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) that tracks corporate bonds that are below investment grade.

The fund flow for fixed income ETFs peaked in 2012 when interest rates fell. The opposite happened in 2013 when interest rates rose. LQD saw maximum fund flows of negative $8.2 billion that year.

Despite ultra-low yields, TLT and LQD attracted positive fund flows of $3.3 billion and $2.8 billion, respectively.

Within Treasury ETFs, you can access different maturities with the iShares 7-10 Year Treasury Bond ETF (IEF) and the iShares 1-3 Year Treasury Bond ETF (SHY), among others.

The bottom line is that even bond ETFs are gaining traction, as ETFs are gaining popularity among investors as an investment vehicle.

Continue to Part 3

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