Todd Rosenbluth on the resurgence of fixed income

JOdd Rosenbluth, Head of Research at VettaFi, recently appeared on TD Ameritrade to discuss the movement of investors into fixed income ETFs with host Caroline Woods.

Last week saw record $58 billion in fixed income ETF trades, mostly in the secondary market between sellers and buyers of stocks.

“We saw record demand for corporate bond ETF trading; we’ve seen it particularly strong in the high-yield bond ETF market,” Rosenbluth explained.

ETFs that experienced particularly high trading levels included the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) to 9 billion dollars of transactions, the SPDR Bloomberg High Yield Bond (JNK) ETF to $4 billion in transactions, and the iShares Broad USD High Yield Corporate Bond ETF (USHY) at $2.2 billion, six times its daily average.

“Investors are turning to fixed income ETFs instead of fleeing them. Part of that is trading activity, but it’s a sign that there’s more liquidity in the fixed income ETF market than investors might have imagined,” Rosenbluth said. .

High yield funds tend to be less interest rate sensitive than treasury bills, but carry significantly higher credit risks. That being said, funds like HYG that are down this year – HYG is down 14.9% YTD – have consistently outperformed the market as a whole.

Within bonds, advisors and investors generally invest in two different strategies in the current environment; they are either looking for ultra-short duration bonds that are less interest rate sensitive while looking to protect their portfolios from the downside, or they are looking for yield potential in higher yielding offerings.

A record $58 billion traded in bond ETFs ahead of last week’s rate hike 😲💸

🎥 @ToddRosenbluth explains how the surge in yields before the Fed led to record money trading in bond funds and talks bond strategy with @Cline_Woods: 📊

— TD Ameritrade Network (@TDANetwork) June 22, 2022

It’s a trend that doesn’t carry over to stocks, Rosenbluth explained.

“In equities, we’ve really seen more of the qualitative aspect and we think investors have been rewarded by favoring higher quality strategies,” Rosenbluth said.

This includes energy with funds like the Algerian MLP ETF (AMLP) as well as in more diversified strategies within equities.

The pivot to fixed-income ETFs has come at the expense of mutual funds, as fixed-income mutual funds have seen outflows this year. This comes as no surprise to Rosenbluth, because in an environment of declining performance, high fees can make losses even more substantial. The price savings that ETFs offer in their lower fees are a good incentive for advisors and investors looking to cut costs, especially in a bearish environment.

“We did a webcast earlier this week with our audience base of VettaFi advisors and they are looking to stay in income but may be looking to move into more equity-focused strategies – I mentioned AMLP earlier – there are quality ETFs like QUAL (ETF iShares MSCI USA Quality Factor) or COWZ (ETF Pacer US Cash Cows 100) which generated a lot of interest,” Rosenbluth explained.

Covered call strategies were also more popular, with funds like the JPMorgan Equity Premium Income ETF (JEPI).

In this environment, there are “many different ways to get income exposure and steer your portfolio away from pure fixed income, and also get some equity exposure,” Rosenbluth said.

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