This year's flows action in the world of exchange-traded funds has largely been defined by risk-off sentiment. That includes advisors and investors flocking to fixed income ETFs.
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At various points this year, six of the top 10 asset-gathering ETFs were bond funds. Although that number has dropped to four, that does not diminish investors' thirst for bond ETFs. In fact, that desire was on display in May as bond ETFs kept packing on assets.
Investors put an additional $4.2 billion of net new money into fixed income ETFs in May, pushing the year to date flows figure to $42 billion, according to Factset data. While demand remained strong for actively managed fixed income mutual funds this year, up until last week, a wide variety of lower-cost ETFs that offer intra-day liquidity and typically seek to passively replicate an index have been gaining share in 2016, said S&P Capital IQ in a note out Monday.
The iShares Core U.S. Aggregate Bond Fund (AGG) is this year's top asset-gathering bond ETF and only the SPDR Gold Trust (ETF) (GLD) has added more new assets year-to-date than AGG. Making AGG's haul all the more impressive is the fact that has added more than double the new money as its primary rival, the Vanguard Total Bond Market ETF (BND). However, BND is still among the top 10 asset-gathering ETFs.
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Bond ETF Flows And Yield Hunting
Bond ETF flows also highlight investors' appetite for yield, and that hunt for yield is helping ETFs holding preferred stocks and senior loans added new assets this year.
Another popular ETF in May was the PowerShares Senior Loan Portfolio (PowerShares Exchange-Traded Fund Trust II (BKLN)), which invests in the 100 largest bank loans with floating rate coupons. BKLN gathered $510.1 million of new assets in May, erasing the outflows the ETF suffered through the first four months of 2016. Unlike fixed-rate ETFs, coupons of BKLN's holdings adjust higher as interest rates rise, said S&P Capital IQ.
Floating rate notes and senior loans are unique in that their yield is tied to a benchmark such as LIBOR, rather than being fixed. Loans are also higher on the capital structure than other unsecured obligations, and some even carry floors to insure you earn a respectable yield even if rates stay low. Their coupon rate typically resets every 90 days, resulting in a duration shorter than three months, Benzinga previously reported.
"Meanwhile, iShares US Preferred Stock ETF (iShares S&P US Pref Stock Idx Fnd (ETF) (PFF)) pulled in $436.9 million of new money last month. The ETF holds approximately 300 securities that combine bond characteristics, such as a fixed stream of income and are senior to common stocks, with common stock characteristics, such as ownership in the company and trading on an exchange. PFF, which has a 0.47 percent expense ratio, sports a 5.8 percent 30-day SEC yield, added S&P Capital IQ.
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