Ring the bell! After averaging over $12 billion of inflows a month in 2019, US-listed fixed income ETFs just hit a record yearly flow total.  And we still have two more months left to go! 

Over $128 billion has gone into bond ETFs in 2019, outpacing the previous record of $127.1 billion in 2017. 

From a market’s perspective, the flows have been fueled by two major trends: 

  • Downside risk mitigation: With geopolitical risk whipsawing sentiment all year, interest rate-sensitive  sectors (e.g., Gov’t/Agg/MBS) have taken in 60% of the flows.
  • Yield at any price: With a dearth of negative-yielding debt and accommodative global central bankers pushing investors further out on the risk curve, high yield ETFs have posted their best year ever in terms of flows (+16 billion) – even though spreads are 30% below long-term averages and the bonds are trading at their most negatively convex level ever.1

Drivers behind this record flow haul include liquidity needs and demographics, in addition to investors having more choices (e.g., active) and ETFs continuing to show their mettle during times of stress.

With these inflows, assets are now firmly over $800 billion. If the next two months keep the average flow gathering pace of 2019 going, US-listed bond ETF assets could surpass $850 billion by year’s end – with a realistic shot at surpassing the one trillion mark in 2020.

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Bloomberg Finance L.P. as of 10/29/2019.

What It All Means and What’s Next

Diversification is the only free lunch, and the double-digit drawdowns from 2018 are still fresh in investors’ minds. So it’s not that big of a surprise to see investors continuing to build up portfolio ballast in a year when the 20% global equity market gains year to date2 are juxtaposed against global economic policy uncertainty sitting at all-time highs.3  

With the outlook for the rest of 2019 looking similar to the first three quarters of the year (slowing economic growth, falling corporate profits, trade uncertainty, Brexit, and low rates) having a diversified mix of assets may be beneficial.  After all, the standard 60/40 portfolio is up double digits in 2019 and having its second best yearly performance over the past 10 years.

1Bloomberg Finance L.P. as of 10/29/2019
2Bloomberg Finance L.P. as of 10/29/2019 based on the MSCI ACWI IMI Index
3Bloomberg Finance L.P. as of 10/29/2019 based on the Global Economic Policy Uncertainty Index
4Bloomberg Finance L.P. as of 10/29/2019 based on a 60% MSCI ACWI IMI Index/40% Bloomberg Barclays US Aggregate Bond Index mix rebalanced annually. In 2019, the 60/40 mix is up 14.4%. Past performance is not a guarantee of future results