Novel Uses
Investors have been shoveling money into U.S. government and mortgage-backed bond ETFs in the past month, anticipating further choppiness from uncertainties over fiscal stimulus and the presidential election outcome. Other strategies for bond funds recently include shorting high-yield securities and hedging long positions.
“There’s a variety of ways they can be used in portfolios, and I think that helps to draw a more diverse investor base,” said Dave Perlman, ETF strategist for UBS Global Wealth Management.
These ETFs also enable clearer price discovery in the less-liquid bond markets and make it easier for investors to amass a diversified portfolio of specific types of securities.
“Institutional investors are getting more comfortable using ETFs to gain more targeted exposure” instead of buying individual bonds, Rosenbluth said.
This, in turn, has created a flurry of new funds. So far this year, 39 fixed-income ETFs have begun trading, compared with 38 at the same point last year and 37 in 2018. Two new ones in 2020 -- iShares 0-3 Month Treasury Bond ETF (SGOV) and Franklin Liberty U.S. Treasury Bond ETF (FLGV) -- have already attracted $890 million and $423 million respectively.
Fed Hangover
Yet the good times may have their limits. The Fed stopped buying bond ETFs in August. And early birds who bought ahead of the Fed could start profit-taking.
Corporate-bond products might see up to $30 billion in outflows in the next month or two, according to Bloomberg Intelligence. The category lost $3.2 billion in September, but has regained $6.1 billion in October so far.
And bond ETFs haven’t converted everyone. Some investors still prefer purchasing the individual bonds.
Jim Paulsen, chief investment strategist for Leuthold Group, said that for high-quality bonds like Treasuries, he would rather just buy them directly, so he doesn’t have to worry about any fees. But he said that for complex formulas and diversifying holdings, the ETFs can come in handy.
“As you get into more credit risk or structure mortgages or prepay instruments, then I think ETFs can play a role,” he said.
This article was provided by Bloomberg News.