© Reuters.
Investors continue to pour into fixed-income exchange-traded funds (ETFs) in spite of widespread bond sell-offs, preparing for enduring high-interest rates. Data from BlackRock (NYSE:) indicates that US and European-listed fixed-income ETFs have seen record net inflows of $235bn in the first three quarters of 2023, a significant increase from $169bn and $222bn during the same periods in 2020 and 2021 respectively.
This trend continued into October with net flows of $13.4bn in the initial 13 days, despite a broader fixed income sell-off. Analysts attribute this to the enticing yields these ETFs offer, their growing popularity as investment tools, and their widespread use in model portfolios. “The rising interest in fixed income ETFs is due to their easy accessibility and attractive yields,” Ben Seager-Scott of Evelyn Partners noted.
However, the continuous yield rise has led to price drops, causing significant losses for investors holding long-dated maturity bonds. For example, an iShares ETF owning Treasuries maturing in 20 years or longer has declined by 12.9% this year.
The unexpected resilience of the US economy has led central banks to persist with rapid interest rate hikes. The Federal Reserve’s funds target rate has surged by over 5 percentage points since early 2022, reaching 5.25 to 5.5%, driving higher yields.
Antoine Lesne of State Street (NYSE:) observed that while the summer sell-off surprised many investors, those with a longer investment horizon may still find these levels attractive. High credit-rated sovereign debt ETFs have attracted most fund inflows, with US Treasury ETFs pulling in over $100bn until October 9th.
Rohan Reddy from Global X noted that short-dated maturity debt products have seen most of these flows due to higher yields compared to their longer-dated counterparts. Investors anticipate interest rates will start declining next year.
Even with major price declines, ETFs holding longer-dated bonds also experienced robust inflows this year as investors increasingly bet on sustained high-interest rates. According to TrackInsight data, iShares’ 20+ years Treasury Bond ETF has been the top-selling fixed-income ETF this year, attracting $17.9bn until October 18th.
Strategists predict continued investment in fixed-income products despite their recent poor performance, primarily due to the asset class being under-owned following years of low-interest rates. However, with global interest rates on the rise, investors are becoming cautious about high-yield ETFs due to increasing default risks. Kevin Flanagan, head of fixed income strategy at WisdomTree, pointed out that investors have been directing inflows into Treasury floating rate notes to lock in returns ahead of inflation. High-yield ETFs have seen net outflows of $1.3bn in the year to October 2, compared with inflows of more than $200bn for investment-grade counterparts.
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