Breaking down long-term trends in bond ETFs

Bond ETFs have seen inflows of $55 billion in 2023 alone. Steve Laipply, BlackRock Global Co-Head of Bond ETFs, sits down with Yahoo Finance Live's Jared Blikre to discuss how the U.S. credit downgrade could be expected to impact bond markets, while showcasing BlackRock and iShare's bond-centric ETFs.

Video Transcript

JARED BLIKRE: --has downgraded the USA's credit rating to AA-plus from AAA. Bonds are shrugging off the downgrade-- or at least they had been-- but they are surging now decidedly unlike the move last time that was made by Standard and Poor's in 2011. For more on this, we turn to Steve Laipply, BlackRock global co-head of iShares fixed income ETFs for this week's ETF report, which is brought to you by Invesco QQQ.

Steve, you were in the thick of the global financial crisis, as I understand, with maybe two firms. But just tell me what you saw back then, and how that might be a little bit different from what we're seeing today?

STEVE LAIPPLY: Yeah, Jared. I think we were in a very different environment back then. So if you recall 2011 when we were coming off of the financial crisis, we had debt crises across Europe-- Southern Europe, in particular-- interest rates were near zero. I think at that time, the US was viewed as the safe haven irrespective of the downgrade. I think that's continuing today.

So what you're seeing in the backup and yields we think is largely a reflection of the treasury supply coming in. You did have a strong ADP number this morning, but I do think there is-- you know, the amount of supply that's coming in through the refundings, we up from, I think, 96 billion to over 100 billion. The amount of-- the amount of issuance is going to continue to go up. Higher interest rates, obviously, are contributing to part of that. So I think it's more that than the reaction to the downgrade.

JARED BLIKRE: And let's talk about what has been happening year to date in the bond world. We've seen ETF flows according to your notes, I believe of $55 billion, about $16 billion, almost $17 billion has been in one ETF alone, that's TLT, which tracks longer-term bonds. Just talk to me about this love for bonds that we seem to have right now.

STEVE LAIPPLY: Yeah. I think investors have reacted very strongly to the repricing of yields last year. It was a great reset in yields. We have not seen yields at these levels in, you know, well over a decade. I think investors responded by retooling their portfolios. So you know, if you go back a few years, you would have to be in high yield to get a 5% yield, and now you can do on the front end of the yield curve.

So I do think what you're seeing flow-wise, we saw over $100 billion in fixed income iShares last year, we're at 55 this year, so we're on track to see similar flows. But in particular, investors have been moving out a bit in duration. So TLT reflects that. You know, we've taken around $16 billion. That to me is a reflection of investors saying they need to start adding ballast. It's very hard to time markets. Obviously, the long bonds down today, right? But it's hard to get the timing exactly right, but they've been strategically moving out duration as a function of adding some ballast to their risk assets.

JARED BLIKRE: And in the ETF world, we saw smart ETFs rise in terms of equities, and now we're seeing similar strategies rise in active trading of bonds. Just tell me about what are some of the newer developments in the bond world in the ETFs that cover it?

STEVE LAIPPLY: I think you're starting to see-- in terms of product innovation, you're starting to see more active ETFs. You're starting to see more defined payout ETFs. So as an example, we just launched-- just in the past month, we launched BINC, which is our income fund run by a Rick Rieder's team. That is designed to be a complement to a core exposure like the aggregate.

So it allows advisors to pair a low-cost core bond exposure, like AGG, with a plus sector or higher income fund, which is BINC, and it allows them to be in the driver's seat in terms of how to modulate between those two. We also launched last year in August our buy-write suite. So that's the covered call. People are very familiar with that in equities, we did that in fixed income with our flagship tickers-- TLT, LQD, and HYG.

Those products on a trailing 12-month basis are generating high teens in terms of yield.

JARED BLIKRE: Impressive.

STEVE LAIPPLY: It's approaching--

JARED BLIKRE: Sounds like crypto numbers almost.

STEVE LAIPPLY: It's approaching-- I think we're at $850 million across the suite. TLTW alone is $700 million. So they're growing very, very rapidly.

JARED BLIKRE: All right. And what's coming down the pike? What can we look forward to in the future that we might not have?

STEVE LAIPPLY: I do think you're going to see more of these tailored products. So a lot of the, you know, vanilla index exposures, those have been done, they're large, they're liquid. We are seeing those products being used very much in an active context. So you're seeing active managers using traditional index ETFs to generate-- to generate alpha.

What we're starting to see on the wealth side is a desire for more of these tailored exposures and active exposure. So I do think you're going to see more active ETFs. I do think you're going to see more tailored payout exposures along the lines of buy-write type exposures.

JARED BLIKRE: Interesting they call it a stock picker's market sometimes, maybe it's a bond picker's market currently. We'll have to have you back to talk about more of that as it develops. Steve Laipply, thank you for dropping by.

STEVE LAIPPLY: Thank you.