“There are some issuers out there realizing that fixed income is going to be a really big trend in general, and that there’s a unique opportunity to add a product to the market that would be a more creative alternative to the big, broad bond index ETFs,” said Todd Sohn, head of ETF analysis at Strategas.
A key factor driving interest this year has been anticipation that the Fed will cut interest rates in 2024 – a process that began with a 50 basis point reduction last week. Officials have penciled in another 150 basis points in cuts by the end of 2025, according to the Fed’s latest Summary of Economic Projections.
Falling interest rates are seen as beneficial to bonds, since they tend to push down yields, which move inversely to bond prices. Investors have also been eager to lock in yields near multi-decade highs before they fall.
The benchmark 10-year Treasury yield recently stood at around 3.75%, down from a high of just above 5% last October.
Issuers have also been encouraged by the growing inflows in bond ETFs. Average monthly net inflows into U.S. bond ETFs have hit a record $25 billion this year, up from $17.1 billion in 2023, Strategas data showed. Inflows for September stood at $22.9 billion as of Sept. 20, according to Trackinsight, a Paris-based firm that monitors the global ETF industry.
The bond ETF space is dominated by iShares Core U.S. Aggregate Bond ETF (AGG.P), opens new tab and the Vanguard Total Bond Market ETF (BND.O), opens new tab, each with about $120 billion in assets. These two passive bond funds track the Bloomberg U.S. Aggregate index and a float-adjusted version of that index, respectively. However, many of the newer funds in the sector, including a large proportion of this year’s launches, are actively managed, with managers picking what securities they believe are likely to outperform a benchmark.
“Fixed income investors have a long-standing preference for actively-managed products,” said Scott Davis, head of ETFs at Capital Group, noting that nearly 80% of all fixed income mutual funds fall into that category. In contrast to mutual funds, ETFs are traded on a stock exchange throughout the day and offer instant liquidity.
One of the largest asset management firms to have made a push into ETFs over the last few years, Capital Group launched its $1.2 billion Capital Group Core Bond ETF (CGCB.P), opens new tab in September 2023.
New products to debut in recent weeks range from the Rockefeller Opportunistic Municipal Bond ETF (RMOP.P), opens new tab, which seeks long-term returns from an actively managed portfolio of munis, and the Congress Intermediate Bond Fund (CAFX.P), opens new tab, and two suites of “longevity income” ETFs from Stone Ridge Asset Management targeted at retirees and promising reliable income for those over 80.
Signs of rebounding inflation or stronger-than-expected growth could curtail the outlook for how deeply the Fed cuts rates, potentially denting the funds’ returns.
For now, though, issuers are betting the trend in the sector is likely to continue.
Fixed income “has been the logical territory to pursue next, now that the equity index fund space and even active equity have become more crowded,” said Aniket Ullal, head of ETF research and analytics at CFRA.
Source from Reuters: https://www.reuters.com/markets/rates-bonds/us-bond-etf-launches-up-50-year-ago-levels-2024-09-24/