While U.S. equity markets have gotten off to a rough start in 2014, interest in fixed income securities has finally resurfaced this year. Last year, most bond ETFs struggled to keep up with the equity market’s quick pace, with many funds ending in the red in 2013. But with the Federal Reserve beginning to taper its massive bond-buying purchases, many investors have begun to return to the coveted asset class [see The Fed Effect: How Monetary Policy Impacts Your ETFs].
A Return to Fixed Income
Fixed income securities have long been heralded as key diversification agents, as well as great sources for current income. But after the central bank began implementing stimulus policies that kept interest rates near zero, yield-hungry investors were forced to turn to other corners of the market – primarily to dividend-paying stocks, REITs, and MLPs.
The combination of the Fed’s tapering and recent spikes of volatility have drawn investors back to the safe-haven asset class this year. Consequently, several bond ETFs have seen impressive inflows so far in 2014 (data as of February 14, 2014):
- 1-3 Year Treasury Bond ETF (SHY, A-)
- 3-7 Year Treasury Bond ETF (IEI, A-)
- Ultra 7-10 Year Treasury ETF (UST, A)
- Total Bond Market ETF (BND, A+)
- 1-3 Year Credit Bond ETF (CSJ, A-)
- 20+ Year Treasury Bond ETF (TLT, B-)
Treasury bond funds have seen some of the highest inflows so far this year, as well as Vanguard’s popular Total Bond Market ETF (BND). In stark contrast, the SPDR S&P 500 ETF (SPY, A) has lost more than 18.56M in total assets under management just this year. Not all bond funds have seen positive fund flows this year; the popular iBoxx $ High Yield Corporate Bond ETF (HYG, A) has seen outflows of 1.83M [see Do Volume Spikes Signal Trend Reversals in the SPDR S&P 500 (SPY)?].
The Bottom Line
Year-to-date fund flows data is showing a crucial shift in investors’ mentalities from last year. Bond ETFs are once again becoming attractive, as investors return to the safe haven amidst recent market volatility and changes in monetary policy. With the Fed expected to continue tapering throughout the year, fixed income securities may finally gain more traction.
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Disclosure: No positions at time of writing.