The bull market for bond ETFs continues with bonds attracting record inflows in the first quarter of 2016. As per a BlackRock report, bond ETFs witnessed inflows of $43.7 billion globally and $31.8 billion in the U.S. in the first quarter 2016.For the first one and a half months, U.S. treasury bonds led the inflows as these offer safety. Needless to say, global growth issues dragged down yields on 10-year Treasury notes by 46 bps to 1.78% (as of March 31, 2016) in the quarter, leading Treasury valuation to soar. However, a shift in trend was observed from the second week of February, when corporate and emerging-market debt ETFs dominated the inflows (read: Time for These Buy-Ranked Treasury Bond ETFs ).
Record flows in bond ETFs could be attributed to the low-yield environment in most developed markets across the world. Disappointing macroeconomic data, global market turbulence and threats to the stability of the U.S. economy have been making headlines since the beginning of the year, leading to volatility across all asset classes. Because of these factors, bond ETFs have of late gained a lot of popularity as investors continue to search for attractive and stable yield in this ultralow rate interest environment.
In fact, all this turbulence led to the central bank lowering the number of hikes and federal funds rate this year. It now expects the federal funds rate to rise to 0.875% by the end of the year, instead of the previously expected 1.375%, implying only two rate hikes as compared to the four projected in December. Last month, the Fed Chair Janet Yellen stated that the U.S. central bank should proceed cautiously in adjusting policy rates (read: ETF Winners & Losers Following Yellen Comments ).
In March, the European Central Bank (ECB) came up with a more intensified economic stimulus and opted for multiple rate cuts and the expansion of its quantitative easing program to boost the economy. Monthly asset purchases were raised to EUR 80 billion from 60 billion previously.
The double blessing of easy monetary policy globally and a delayed rate hike in the U.S. made fixed-income securities a winner in the first quarter, as investors scurried to safer assets. So, it would be interesting to note the ETFs that were the leaders in terms of inflows in the bond space during the quarter (see: Total Bond Market ETFs here ).
iShares Core U.S. Aggregate Bond ETF ( AGG ) – Inflow $3.5 billion
Among the bond funds, the iShares Core U.S. Aggregate Bond ETF recorded the highest inflow of $3.5 billion as per ETF.com . This fund seeks to match the performance of the Barclays US Aggregate Bond Index comprising total U.S. investment-grade bond. The fund holds 5,417 bonds in total with effective maturity of 5.24 years and average duration of 7.43 years. Expense ratio came in at 0.08%. The product has amassed $35 billion in its asset base while it sees moderate volume of 3.1 million shares per day on average. It gained 2.75% since the beginning of the year (as of April 7, 2016) (read: Best Stocks and ETFs for Your IRA ).
iShares 20+ Year Treasury Bond ETF ( TLT )- Inflow $2.5 billion
This is one of the most popular and liquid ETFs in the long-dated bond space with AUM of over $8.1 billion and average daily volume of more than 8.6 million shares. It tracks the ICE U.S. Treasury 20+ Year Bond Index, holdings 32 securities in its basket. The fund has average maturity of 26.6 years and effective duration of 17.8 years. It charges 15 bps in annual fees and is up 9% in the year-to-date period. The fund has a Zacks ETF Rank of 2 or ‘Buy’ rating with a High risk outlook.
SPDR Barclays Capital High Yield Bond ETF ( JNK ) – Inflow $2.2 billion
This product accumulated about $12.3 billion in its asset base. It offers exposure to the high yield corner of the bond ETF world and follows the Barclays High Yield Very Liquid Index. The fund holds 800 low-rated (BB and lower) corporate bonds with average maturity of 6.39 years and modified adjusted duration of 4.28 years. Expense ratio came in at 0.40% while volume is robust as the fund exchanges more than 13.8 million shares a day. The ETF gained 1.1% so far this year and has a Zacks ETF Rank of 4 or ‘Sell’ rating with a High risk outlook (read: Junk versus Investment Grade Corporate Bond ETFs ).
iSharesiBoxx $ Investment Grade Corporate Bond ETF ( LQD )- Inflow $1.9 billion
This fund targets the corporate bond world by tracking the MarkitiBoxx USD Liquid Investment Grade Index and holds 1,546 securities in the basket. The fund has a total asset base of $27.5 billion while it exchanges more than 3.8 million shares a day. It focuses on high quality bonds (BBB and plus) with average maturity of 12.54 years and effective duration of 8.34 years. Expense ratio came in at 0.15%. The product is up 4.8% so far this year and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook.
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