Fixed income is causing a headache for investors this year as yields on Treasuries and other debt securities slip into negative territory, however, research shows investors are planning to increase their exposure.
Global research and consulting firm Cerulli Associates put out a report that reflects research done by Tabula Investment Management, which found that nearly a third of respondents plan to increase their exposure to fixed income ETFs over the next three years.
The drivers for this include portfolio diversification, cost, and versatility.
Data from ETFGI shows August saw fixed income ETFs/ETPs listed globally attract net inflows of $16.4bn in August, bringing net inflows for 2019 to $148.1 bn, which was up from the $66.9bn attracted by the end of August 2018.
Deborah Fuhr, managing partner and founder of ETFGI, commented: “The S&P 500 slid 1.6% during August, which can be partially attributed to both the growing tensions stemming from the US-China trade talks, or lack thereof, and the sentiment placed on the inverted US yield curve.”
This year has largely been good for fixed income. In the first three months of this year fixed income ETFs registered record inflows and net flows for fixed-income ETFs in Europe reached €18.5bn, which is the largest ever quarterly total these ETFs. Flows into bond ETFs accounted for twice the volume seen in equity ETFs.
“Bond ETFs continue to gain traction. Our comparison of European equity and bond ETF assets from the beginning of 2017 to the middle of this year confirms that bond ETF assets grew strongly in the first half of 2019, from €162.5bn to €200.7bn. This was on the back of a more than 7% increase in bond ETF assets during 2018,” notes Fabrizio Zumbo, associate director, European asset management research at Cerulli Associates.
And providers are following the trend. At the end of last month, Amundi expanded its range of prime ETFs with the launch of an investment-grade US corporate bond ETF which tracks the Solactive USD Investment Grade Corporate Bond index.
The reason for the increased interest in fixed income bond ETFs is down to the low rate market environment. The indexes largely include companies that issue debt that have investment-grade credit ratings.
For example, companies such as Amazon, Google, Microsoft are able to offer bonds with lower yields because investors are confident that they won’t default. This is one reason why corporate bonds are good in a low rate environment.
They are largely considered low risk because they have a low incidence of default over time. The more highly rated the bond the lower the chance of default. The highest credit rating given is AAA, which have an average default rate of 0%.
Timo Pfeiffer, chief markets officer at Solactive, said the launch of the Amundi Prime US Corporates UCITS ETF appeases the demand of investors looking for alternative fixed income vehicles in today’s low-interest-rate environment.
One of the best performing of the ETFs year-to-date is the Lyxor USD Corporate Bond UCITS ETF with a return of over 15% and is also one of the cheapest ETFs on offer at 0.09%. It tracks the Markit iBoxx USD Liquid Invest. The Markit iBoxx USD Liquid Investment Grade 150 Mid Price TCA index represents the performance of the 150 largest and most liquid investment grade corporate bonds issued in US Dollar.
There are also actively managed corporate bond ETFs on offer. PIMCO’s low duration US corporate bond Source UCITS ETF (LDCU) is actively managed investing in USD denominated investment grade corporate fixed income instruments. It costs 0.49%, which is more expensive than the passive tracking options available, but likely remains cheaper than accessing bonds through a manager alone.
We put below a selection of the corporate bond ETFs available on the London Stock Exchange.
VDCP
TCGB
USIG
STEA
XUHY
Expense Ratio0.2%
SUSD
PUIG
USCO
FLUC
JRUB
LDCU
IUCB
ETFYTD RTNTERINDEXVanguard USD Corporate Bond UCITS ETF13.03%0.12%Bloomberg Barclays Global Aggregate Corporate - United States Dollar IndexThink iBoxx Corporate Bond UCITS ETFn/a0.15%Markit iBoxx EUR Liquid Corporates Index. This Index follows 40 corporate bonds which are issued and traded in EuroLyxor USD Liquid Investment Grade Corporate Bond ETF15.23%0.09%Markit iBoxx USD Liquid InvestPIMCO Short-Term High Yield Corporate Bond Index Source UCITS ETF (€)5.70%0.60%BofA ML 0-5 Year US High Yield Constrained IndexXtrackers USD High Yield Corporate Bond UCITS ETF12.57%Mgmt Fee0.10%Bloomberg Barclays US High Yield Very Liquid Index ex 144ASPDR Bloomberg Barclays 0-3 Year U.S. Corporate Bond UCITS ETF (£)4.44%0.20%Bloomberg Barclays 0-3 Year US Corporate Bond IndexInvesco USD Corporate Bond UCITS ETF13.37%0.16%Bloomberg Barclays USD IG Corporate Liquidity Screened Bond IndexSPDR Bloomberg Barclays U.S. Corporate Bond UCITS ETF13.03%0.20%Bloomberg Barclays Index.Franklin Liberty USD Investment Grade Corporate Bond UCITS ETF12.63%0.35%Bloomberg Barclays US Corporate Bond IndexJPMorgan USD Corporate Bond Research Enhanced Index UCITS ETF13.51%0.19%The objective of the Sub-Fund is to achieve a long-term return in excess of the Benchmark by actively investing at least 67% of the assets in investment grade USD denominated corporate debt securities (excl.assets held for ancillary liquidity purposes)PIMCO Low Duration US Corporate Bond Source UCITS ETF6.20%0.49%The fund is actively managed and invests primarily in US Dollar denominated investment grade corporate Fixed Income InstrumentsSPDR Bloomberg Barclays 1-10 Year U.S. Corporate Bond UCITS ETF10.72%0.20%The Fund's objective is to track the performance of the intermediate maturity, investment grade U.S. corporate bond market. Only bonds that have a maturity of between 1 and 10 years are included
