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Why Bond ETFs Thrived in April

This article was originally published on ETFTrends.com.

Investors piled into fixed income exchange traded funds last month, focusing on short duration fare such as the iShares Short Treasury Bond ETF (SHV) . The Federal Reserve raised interest rates in March and many bond market observers are pricing in as many as four rate hikes this year, prompting investors to embrace funds with lower rate risk.

“Investors put $2.5 billion into the iShares Short Treasury Bond ETF last month, making it the most​-​popular exchange-traded fund in April, according to FactSet. The ETF, which holds Treasurys that mature in 12 months or less, has taken in $5.8 billion so far this year. Another $1.7 billion has gone into two similar ETFs from Goldman Sachs Group Inc. and State Street,” reports The Wall Street Journal.

The SPDR Barclays 1-3 Month T-Bill (BIL) has been another popular destination for bond investors this year. BIL seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the Bloomberg Barclays 1-3 Month U.S. Treasury Bill Index

Rate Forecasts for Remainder of 2018

As the Federal Reserve continues to tighten policy, the ability to generate returns in short-dated fixed income ETFs has increased. As a result, money has been flowing into short term treasuries and cash type products to gain interest from investors.

BIL is less exposed to fluctuations in interest rates than longer duration securities and thus a more secure investment.

“Short-term debt is more attractive when interest rates rise because it’s less exposed to losses if inflation surges,” according to the Journal. “Long-term debt is more vulnerable to inflation pressures, ​which erode the purchasing power of bonds’ fixed coupon payments, ​and tends to fall further when interest rates rise.​”

Bond ETF asset flows revealed that investors utilized the investment vehicle to better manage risk in volatile market conditions. While many use ETFs for long term and core portfolio exposures, some investors incorporated ETFs to manage risk as geopolitical uncertainty affected market volatility and potential impact to global economies. For instance, the volume of ETF trading in the first quarter showed significant activity in U.S. Treasury, investment grade, emerging market and high yield bond ETFs.

“Bond ETFs proved particularly popular in April, accounting for six of the top 10 asset gainers with combined inflows of nearly $9 billion, according to FactSet. All six ETFs were from BlackRock’s iShares lineup, and included ETFs that invest in Treasurys maturing in one year or more, investment grade corporate bonds and bonds with floating interest rates,” reports the Journal.

For more information on the fixed-income market, visit our bond ETFs category.