Investments in U.S. fixed-income ETFs have been growing at a pace faster than equity ETFs, with industry experts predicting this trend to sustain over the coming years.
The increase in funds channeled into U.S. ETF fixed-income can be linked to the Federal Reserve’s recent rate hikes. Even though a rate cut is anticipated next year, it’s expected to be gradual, supporting the growth momentum of fixed-income ETFs.
Ryan Murphy, who oversees fixed-income business development at Capital Group, commented, “There’s a growing interest in fixed income among investors. This might just be the start of a larger shift we’ll witness in the near future.”
Last month’s data from ETF Action revealed that fixed income ETFs witnessed net inflows of $10.9 billion, whereas equity ETFs had a $7.4 billion inflow. According to Morningstar Direct, inflows to fixed-income ETFs in 2023 saw a 9.6% organic growth till August end, outdoing the 3.2% growth observed for equity ETFs.
Kevin Flanagan of WisdomTree remarked, “There’s a newfound appreciation for high rates lasting longer. The emerging generation of investors find a 5% return on ‘risk-free’ Treasurys very appealing.”
Despite stocks being the preferred asset class for U.S. savers, the uptick in interest rates is diverting investments towards the debt markets. As Cinthia Murphy from ETF Think Tank put it, “Given the present high-rate scenario, the stock market outlook that seemed promising this year is becoming less so.”
The future trajectory of interest rates remains an area of debate. Some predict the Fed may not raise rates, and cuts could be introduced early next year. A few anticipate prolonged inflation, leading to continued high interest rates. Nonetheless, a consensus is that the prepandemic lows in rates might not be revisited soon.
Historically, the 10-year Treasury yield largely remained under 3% before the pandemic, but last month, it spiked to 4.339%, a peak not seen since 2007. Factors like the issuance of more U.S. government debt to counter the growing national deficit also buoy Treasury yields.
Sifma data indicates that the gross issuance of Treasurys up to early August this year was 24% more than the previous year. This increased supply has the effect of pushing bond prices down and their yields up.
Jake Hanley from Teucrium points out that inconsistent economic data, which heightens bond market volatility, is bolstering the attractiveness of ETFs as a method to capitalize on increasing returns. He mentioned that ETFs provide individual investors a gateway to strategies usually accessible only to seasoned managers.
WisdomTree’s Flanagan expressed his preference for two-year maturity floating-rate Treasury notes linked to 13-week bills. The WisdomTree Floating Rate Treasury Fund ETF, or USFR, saw a 3.5% price return this year until September 1, with assets worth $18 billion.
Meanwhile, Capital Group’s Core Plus Income ETF, abbreviated as CGCP, reported a 1.8% return rate this year, managing assets worth $1 billion. The main components of this fund comprise mortgage-backed assets (44%), corporate bonds and loans (32%), and U.S. Treasury bonds (14%).
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Author Kristen Moran 
