Considering that equities gave investors a really hard time in December, as well as throughout the fourth quarter, perhaps it’s not surprising that people are seeking refuge in fixed income in early 2019 as they lick their wounds and try to gauge the market’s direction in the new year. That, and Federal Reserve Chairman Jerome Powell’s newfound flexibility about interest rate hikes could be a reassuring sign for fixed-income investors.
Either way, seven of the top 10 exchange-traded funds in terms of asset flows in the first week of 2019 are fixed-income products, according to XTF.com. Leading the way is the iShares 7-10 Year Treasury Bond ETF (IEF), an intermediate-term bond fund with year-to-date flows of slightly more than $2 billion. That’s more than double the inflows of $884 million into the second fund on the list, the Financial Select Sector SPDR Fund (XLF).
IEF is a passively managed fund with total assets of $12.3 billion. It comes with an expense ratio of 0.15 percent and a SEC yield of 2.51 percent. The fund’s share price gained 3 percent during the tumultuous fourth quarter, which is in line with its average five-year return of 2.8 percent. Despite the huge inflows in the early going, its price is down close to 1 percent year-to-date.
The interest in the Financial Select Sector SPDR Fund could be a case of value investors sniffing out beaten-down sectors from the prior year. The $24.2 billion fund lost 13 percent last year as financial services companies—particularly banks, which comprise 43 percent of this fund—took it on the chin in 2018.
The fund is up nearly 2 percent so far this year, as holdings such as Goldman Sachs, Citigroup and Bank of America have rallied more than 10 percent since their late-2018 nadirs.
Other bond ETFs in the top 10 run the gamut, though one overarching theme is that the overall list is dominated by iShares with five fixed-income funds. And one of its equity funds, the iShares Core MSCI Emerging Markets ETF (IEMG), also appears on the list. The other equity fund in the group is the Vanguard Total Stock Market ETF (VTI).
Among the other bond funds in the top 10, the SPDR Barclays Intermediate Term Treasury ETF (ITE) and iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) focus on bonds with intermediate-term maturities.
The iShares U.S. Treasury Bond ETF (GOVT) and iShares Core Aggregate Bond ETF (AGG) contain securities with various maturities, while the SPDR Portfolio Long Term Treasury ETF (SPTL) invests in long-term bonds and the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) holds debt with various maturities and multi-credit grades.
“We have seen investors lower their rate expectations amidst ongoing trade conflicts and concern about an economic slowdown,” says Heather Brownlie, head of U.S. iShares Fixed Income. “These uncertainties, along with equity volatility, have led some investors to extend duration and increase allocation to U.S. Treasuries and investment-grade bonds broadly in an effort to build more resilient portfolios.”
She notes that from a risk-reward perspective, investors are finding value in emerging-market U.S. dollar-denominated bonds.