By Elya Schwartzman, ES Investment Consulting LLC
Now that we have experienced three or four different risk regimes in 2020 (see chart below), as well as received detailed data from the Fed, I thought it would be interesting to examine the pace of Fixed Income ETF flows so far this year, and try to put some context behind the data.
The microcosm of the first half of 2020 is going to provide fund managers and economists fodder for years of interesting research. In the chart above, I outline the regimes we have experienced so far this year: (1) Steady state: Jan 1 through mid-Feb (2) Risk-off (“Panic”): through March 23, when the Fed announced credit support measures; and then a sharp bullish move through May.
Summary of 2020 ETF Flows: Through mid-June, Fixed Income ETFs reported inflows of $78 Billion, as compared to Equity ETF inflows of $88 Billion, however equity ETFs have more than 3 times the total AUM. In comparison, ICI estimates that Mutual Funds reported outflows of -195B in equities and -117B in bonds (NOT including Money Markets).
These large inflows were far from consistent throughout the year, and varied greatly by fixed income sector. For example, as the charts below illustrate, risk regime greatly determined winners & losers, and you can see the big switch in mid-March from “Safe” to “Risky” funds. As I have discussed in excruciating detail, the FED announcements starting in March were a major driving factor.
Fixed Income ETF Sectors: Corporate ETFs dominated the inflows this year, accounting for 36% of the $78B fixed income inflow, though this was due entirely to the last three months, with Govt bond ETFs dominating flows in March with most other sectors reporting outflows. Emerging Market and TIPS funds were the only sectors with consistent outflows since the start of the year.
Fund Flow Concentration: Not surprisingly, flows were concentrated in the largest, most liquid bond funds, with ten ETFs accounting for over 80% of total ytd flows. LQD & HYG dominated, with BIL and SHY also reporting flows of over $7B each.
Of the 236 fixed income ETFs with assets above $100 million, 151 reported positive flows this year, with the largest outflows coming from EM, TIPs, Loans, and long-dated government bond funds. However, while the top 10 inflow funds added $68B, the top 10 outflow funds represented just $20B in outflows.
What about Fed Activity? We know that the Fed has purchased roughly $7B of corporate ETFs since May 12th, buying at a pace of roughly $300 million per day. Even though the transmission of secondary buying (Fed) into primary flows is complex and reflects various other market dynamics, let us for the sake of simplicity assume that the Fed has been directly responsible for 25% of the inflows in corporate ETFs. According to the May 29 release, the Fed has been buying 15 large ETFs, splitting the purchases between 85% Investment Grade funds and 15% High Yield. If we assume that a similar split occurred through June 17th, then the Fed currently owns 0.8% of the US Fixed Income ETF Universe.
Not surprisingly, the Fed-targeted ETFs are much higher represented in the top flow-receivers of the last three-months vs. year-to-date flows.
(Fed estimated $MV ownership is based on May 29 actual ownership percentage applied to June 17 total value of Fed ETF ownership)
Secondary Trading: According to TRACE, secondary trading volume through May has risen +17% in Investment Grade, and +30% in High Yield. While likely a topic for greater investigative detail, I suspect that much of this activity is due to the buying & selling of corporate ETF basket bonds.
Stay safe out there.
Elya Schwartzman is the founder and president of ES Investment Consulting LLC (ESIC LLC), an independent advisory firm specializing in ETFs, indexing, fixed income portfolio management, and investment infrastructure / technology.