Investors are heavily investing in exchange-traded funds (ETFs) that invest in a selected range of bonds and have recorded record inflows since January, driving the sector towards its first annual inflow of $1 trillion.
Actively managed fixed income ETFs took in $7 billion in June and attracted a total of $41 billion in the first half of 2024, surpassing the record of $33 billion from the entire year of 2023, according to data from State Street Global Advisors, the third-largest US ETF issuer.
Most investors think of ETFs in terms of passive equity strategies like index funds, popularized by SSGA, Vanguard, and BlackRock, which make up the majority of the market. However, active ETFs and especially bond ETFs are increasingly attracting new money from investors in the $9 trillion US ETF industry.
I see no reason why this momentum should wane," said Matt Bartolini, Head of SPDR Americas Research at SSGA. "On the contrary, I see it growing," he added, pointing to the longer track records that are sparking investor interest.
They were supported by the interest of private investors, particularly younger investors, and a rule change by the Securities and Exchange Commission in 2019 that simplified the process for introducing new ETFs and paved the way for active ETFs. ETF managers also benefit from actively managed offerings, as these are on average about three times more expensive than their passive counterparts, according to the Investment Company Institute.
While actively managed ETFs are experiencing record inflows this year and making up the majority of new fund launches, actively managed mutual funds continue to lose billions of dollars each month. They also tend to have lower fees, on average about 11 basis points less than their mutual fund counterparts, according to the ICI.
Long-time ETF industry observer Dave Nadig noted that it has been almost four years since an all-time high was reached in the most widely used U.S. bond index, the Bloomberg US Aggregate Bond Index, or simply 'the Agg'.
That is a long time for an index to be so boring, so investors will obviously take every opportunity to outperform it," said Nadig.
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"According to SSGA, US ETFs took in over $80 billion in June, bringing the total to $411 billion in the first half of the year. The record for the calendar year is just over $911 billion in 2021.
ETF inflows are typically higher in the second half of the year, partly due to year-end reallocations to maximize tax benefits. Bartolini said that the US ETF industry could possibly see its first inflow of $1 trillion this year, adding that the chances of reaching $1 trillion would increase if the Federal Reserve were to cut interest rates and trigger a "Santa Claus Rally" at the end of the year.
It would have to be a massive December," said Bartolini.
