Bond-focused exchange traded funds (ETFs) have seen a significant surge in launches in 2024, nearly doubling from last year's figures, largely driven by expectations of interest rate cuts by the Federal Reserve, according to data from CFRA and Strategas. So far this year, nearly 120 bond ETFs have been introduced, compared to 79 by the end of September 2023.
September alone has seen a notable spike in launches, with bond products accounting for 46 per cent of all ETF debuts, as per CFRA's findings. This contrasts sharply with the average of around 20 per cent for the entirety of 2024. The newly launched products encompass a diverse range, including those focused on municipal bonds, high yields, and collateralised loan obligations.
A key factor propelling this interest has been the anticipation that the Federal Reserve will implement interest rate cuts in 2024. The process began with a 50 basis point reduction last week, with officials projecting an additional 150 basis points in cuts by the end of 2025, as outlined in the Fed's latest Summary of Economic Projections. Falling interest rates tend to benefit bonds by pushing down yields, which move inversely to bond prices, prompting investors to lock in yields near multi-decade highs before they decline.
Currently, the benchmark 10-year Treasury yield hovers around 3.75 per cent, a decrease from just above 5 per cent last October. The burgeoning inflows into bond ETFs have also encouraged issuers. Average monthly net inflows into U.S. bond ETFs reached a record $25 billion this year, up from $17.1 billion in 2023. As of September 20, inflows stood at $22.9 billion, according to Trackinsight, a Paris-based firm that monitors the global ETF industry.
The bond ETF market is predominantly led by the iShares Core U.S. Aggregate Bond ETF and the Vanguard Total Bond Market ETF, each boasting approximately $120 billion in assets. These two passive bond funds track the Bloomberg U.S. Aggregate index and a float-adjusted version of that index, respectively. However, many of this year's new offerings are actively managed, with managers selecting securities they anticipate will outperform benchmarks.
"Fixed income investors have a long-standing preference for actively-managed products," noted Scott Davis, head of ETFs at Capital Group, adding that nearly 80 per cent of all fixed income mutual funds are actively managed. Unlike mutual funds, ETFs are traded on stock exchanges throughout the day, providing instant liquidity.
One prominent asset management firm that has recently expanded into the ETF space is Capital Group, which launched its $1.2 billion Capital Group Core Bond ETF in September 2023. Recent product debuts include the Rockefeller Opportunistic Municipal Bond ETF, aimed at generating long-term returns from an actively managed municipal bond portfolio, and the Congress Intermediate Bond Fund. Additionally, Stone Ridge Asset Management has introduced two suites of "longevity income" ETFs targeted at retirees, promising reliable income for those over 80.
Despite potential signs of rebounding inflation or stronger-than-expected growth, which could impact the Fed's rate-cutting trajectory and consequently the funds' returns, issuers remain optimistic about the sector's ongoing growth. "Fixed income has been the logical territory to pursue next, now that the equity index fund space and even active equity have become more crowded," stated Aniket Ullal, head of ETF research and analytics at CFRA.
Source: Reuters
