Sept 24 (Askume) – Issuance of bond-focused exchange-traded funds in 2024 will almost double last year, driven by expectations of a rate cut by the Federal Reserve, according to CFRA and Strategas.
Strategas data shows that about 120 bond ETFs have been launched so far this year, and 79 bond ETFs are on track by the end of September 2023.
CFRA data shows a sharp increase in issuance this month, with bond products accounting for 46% of all ETF issuance. By comparison, the average growth rate of all launches in 2024 is about 20%. The new products come in a variety of types, ranging from municipal bond exposure to products focused on high yields and collateralized debt obligations.
Todd Sohn, head of ETF analysis at Strategas, said: “Some issuers realize that fixed income in general is going to be a very big trend and there is a unique opportunity to add a product to the market that will serve a large, broad market.
One of the main drivers of interest rate hikes this year is the expectation that the Federal Reserve will cut interest rates in 2024 — a process that began with a 50 basis point cut last week. According to the Fed’s latest summary of economic forecasts, officials plan to cut interest rates by 150 basis points by the end of 2025.
Falling interest rates are considered good for bonds because they reduce yields, which are inversely related to bond prices. Investors are also eager to lock in yields at multi-decade highs before they fall.
The benchmark 10-year Treasury yield has recently hovered around 3.75%, down from just above 5% last October.
Issuers are also encouraged by rising flows into bond ETFs. Strategas data shows average monthly net flows into U.S. bond ETFs reached a record $25 billion this year, up from $17.1 billion in 2023. Investments in September were $22.9 billion through Sept. 20, according to TrackInsight, a Paris-based company that tracks the global ETF industry.
The bond ETF sector is dominated by the iShares Core U.S. Aggregate Bond ETF (AGG.P) and the Vanguard Total Bond Market ETF (BND.O) , both with about $120 billion in assets. The two passive bond funds track the Bloomberg U.S. Aggregate Index and a float-adjusted version of the index, respectively. However, many of the industry’s new funds — which account for a large portion of launches this year — are actively managed, with fund managers selecting securities they believe are likely to outperform their benchmarks.
“Fixed-income investors have long preferred actively managed products,” said Scott Davis, director of ETFs at Capital Group. He added that about 80% of fixed-income mutual funds fall into this category. Unlike mutual funds, ETFs trade on stock exchanges throughout the day and provide instant liquidity.
Capital Group is one of the largest asset managers to enter ETFs in the last few years.Launched the $1.2 billion Capital Group Core Bond ETF (CGCB.P) , which matures in September 2023.
New products launched in recent weeks include the Rockefeller Opportunistic Municipal Bond ETF (RMOP.P) , which seeks long-term returns from an actively managed municipal portfolio, as well as the Congressional Intermediate-Term Bond Fund (CAFX.P) and Stone Ridge Assets.
A pick-up in inflation or signs of stronger-than-expected growth could limit the Fed’s chances of cutting interest rates, impacting fund returns.
However, issuers currently expect the trend in this sector to continue.
“Now that the equity index fund space and even active stocks have become more crowded, fixed income has become the logical area to take the next step,” said Aniket Ullal, head of ETF research and analysis at CFRA.
