Things were looking pretty bleak back in March for bond exchange-traded funds. The Covid-19 selloff created a liquidity crunch that drove their prices to trade at deep discounts to the value of the underlying assets. Skeptics questioned whether these products could ever be trusted again.
Then the Federal Reserve stepped in. On March 23, it announced that that it would begin buying corporate debt ETFs. This ignited a wave of front-running investments and served as a stamp of approval for the market sector.
A thank-you note to Jerome Powell may be in order. Flows into U.S. fixed-income products this year have surpassed the total for all of last year. New funds are coming down the pipeline. And investors are increasingly using corporate bond ETFs to bet on an economic recovery and hedge against what could be a volatile post-election season.
“The events from the onset of the pandemic have only accelerated the growth of fixed-income ETFs,” said Matthew Bartolini, head of SPDR Americas Research at State Street Global Advisors.
So far this year, inflows to bond funds total $170 billion, compared with $154 billion in all of 2019, according to data compiled by Bloomberg.
Of course, another sharp downturn could reopen a chasm between bond ETF prices and their underlying assets, and the Fed’s eventual unwinding of its holdings might spur distress. But the central bank hasn’t given indications about its exit timeline, so purchases for fixed-income funds remain strong.
The Fed has bought 16 different corporate bond ETFs, with purchases peaking in June at $4.2 billion, according to data from Bloomberg Intelligence. Investors anticipating the central bank’s moves added $28 billion to those products.
Two of the funds the Fed bought ended up topping the list of biggest sector gainers this year. BlackRock’s iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) is leading with $17.5 billion, while Vanguard’s Intermediate-Term Corporate Bond ETF (VCIT) has attracted $12.2 billion.
LQD And VCIT Lead Bond ETF Inflows This Year
Even some without the Fed backing have seen stellar years. Vanguard’s Total Bond Market ETF (BND) and BlackRock’s iShares Core U.S. Aggregate Bond ETF (AGG) have added $12.1 billion and $8.2 billion, respectively.
“We’re already in record territory, and we’re likely to blow that record away, given the volatility headed into an election,” said Todd Rosenbluth, head of ETF and mutual fund research for CFRA Research.