The New ETF Darlings – US-FOREX.US
After the stock market lost 37% last year, retail investors have developed a taste for comparatively stodgy fixed-income assets, especially exchange-traded funds. Assets under management by fixed-income ETFs climbed 47%, to 83 billion, this year, according to Barclay’s data. That gain outpaced the 17% jump in assets held by all U.S. ETFs.“Some people are feeling gun shy with equities,” said Tom Graves, equity analyst at Standard & Poor’s. Graves and others believe that investors, nervous from watching stock investments in their retirement accounts swing, have taken to less volatile bond markets, where high-rated corporate securities with near certain yields of 6% can look more appealing than betting on stocks. ETFs are usually the cheapest route, offering lower fees than managed bond mutual funds or open-end index funds.Of iShares’ four most-popular ETFs in July, two were bond funds, according to Morningstar: the iShares Barclays TIPS Bond
, which follows an inflation-linked index, and iShares Barclays 1-3 Year Credit Bond
, a corporate credit fund.Where the money goes, fund managers soon follow. At least 14 new fixed-income funds were started this year. Bond giant Pacific Investment Management Company launched its first bond ETF in June, the 1-3 Year U.S. Treasury Index Fund
. Vanguard also unveiled seven new bond index funds earlier this month. Expected to become available by the end of the year, the Vanguard funds will track a range of corporate and government bond indexes and be available as ETFs.
Fixed-income funds’ appeal is also partly a result of corporate bonds’ spectacular run. Speculative-grade notes from companies with heavy debt burdens have soared 38% this year and junk bond ETFs have become popular picks on investing blogs. The flow of money into such funds may be evidence of retail investors chasing returns, but that’s not why Vanguard and PIMCO are offering new fixed-income ETFs, said Daniel Wiener, chairman of Adviser Investments.
“They see this is where indexing is heading,” Wiener said. As a result, Vanguard, whose name is synonymous with index funds, wants to compete in the young and growing ETF field, now dominated by iShares and State Street
.
Wiener sees the development of fixed-income ETFs following the same trajectory as open-end bond index funds. They seemed to lag behind stock market funds in assets and variety. Vanguard introduced its Total Bond Market fund in 1986. It took six years to get 1 billion in assets and held 5 billion by the end of 1997, according to his data. Everybody knew about Vanguard’s stock index funds, he said, “but it took years for the Total Bond Market to gain momentum. It’s like people didn’t figure out that if indexing worked in stocks, then it would work in bonds.”