The timing of the first U.S. interest rates hike in almost a decade has been unsettling the financial world for long. In all FOMC meetings so far this year, the Fed has kept its rates unchanged and hinted toward a slower rate hike path when it is warranted.
The September Fed meeting was also no different suggesting cheap money flows for longer than expected as China and global slowdown concerns are weighing on domestic growth. The dismal job report for September and the latest Fed minutes confirmed this trend, further dampening the prospect of an interest rates hike for later this year or early next year (read: Guide to Interest Rate Hikes and ETFs: 4 Ways to Play).
This has rekindled investor’s interest in the bond space, as lower rates will push the yields down boosting the prices for the bonds. Added to the popularity was global stock market instability, which wiped out nearly $11 trillion from the global markets in Q3. Last week, the International Monetary Fund (IMF) cut its global growth forecasts for the second time this year and warned of a rising risk of global recession. The agency now projects global economy to grow by 3.1% for this year and 3.6% for the next as compared to the previous forecasts of 3.3% and 3.8%, respectively.
All these factors compelled investors to flock to the bond funds. As a result, the U.S. fixed income ETFs were winners last week (ending October 8), gathering nearly $6 billion in total assets, as per ETF.com. Below, we have highlighted the five bond ETFs that have seen highest inflows in the initial days of the fourth quarter:
SPDR Barclays Capital High Yield Bond ETF (JNK – ETF report)
This product accumulated about $1.8 billion in its asset base in the first few trading sessions of October, propelling its AUM to $10.8 billion. It offers exposure to the high yield corner of the bond ETF world and follows the Barclays High Yield Very Liquid Index. The fund holds 783 low-rated (BB and lower) corporate bonds with average maturity of 6.12 years and modified adjusted duration of 4.32 years.
Expense ratio came in at 0.40% while volume is robust as the fund exchanges more than 8.8 million shares a day. The ETF gained 2.1% so far this month and has a Zacks ETF Rank of 4 or ‘Sell’ rating with a High risk outlook (read: Junk Bond ETFs: A Trouble Zone).
iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD – ETF report)
This fund targets the corporate bond world by tracking the Markit iBoxx USD Liquid Investment Grade Index and holds 1,462 securities in the basket. It pulled in nearly $9388 million in capital to start October, propelling the total asset base to $23.1 billion. It focuses on high quality bonds (BBB and plus) with about 66% going to the mid-term bonds and 34% to the long-duration bonds.
As a result, it has a relatively higher default risk and interest rate risk, with average maturity of 12.25 years and effective duration of 8.02 years. Expense ratio came in at 0.15%. The product was up 0.2% in the same time frame and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook.