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Oct. 2, 2017, 9:19 a.m. EDT

Bond ETF inflows top $100 billion for 2017

It’s first time inflows have broke 12-digit barrier in a calendar year

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By Ryan Vlastelica

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Exchange-traded funds, which have hit record after record in terms of assets and adoption in 2017, can add another milestone to the list.

Easily shattering the move that occurred over all of 2016, year-to-date flows into bond ETFs topped $100 billion this week. This is the first time that bond ETFs have broken the 12-digit barrier in a single calendar year, and they did it with three months to spare.

Over the past week, $2.6 billion has flowed into the category, bringing their 2017 total to $101.9 billion, per FactSet data.

“This record is both a bond story and an ETF story,” said Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors. “First, this is about the efficiency and flexibility of using an ETF rather than buying individual bonds. Secondly, there’s a desire for both income and a portfolio ballast. Even though the market has been very complacent throughout the year, there’s been a significant undertone of geopolitical uncertainty that has rocked sentiment.”

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Currently, there are about $565.6 billion in U.S. fixed-income ETF assets, an amount dwarfed by the $2.5 trillion in equity-based funds. While stock ETFs have had higher year-to-date inflows on an absolute basis—$220.1 billion—the move is significantly smaller when considered as a percentage of the category’s total assets.

Bartolini said the move into bond ETFs wasn’t a reason to be skeptical of the equity market, where major indexes have been hitting all-time highs and some analysts are concerned about valuation.

“Investors are preparing for ‘the big one’ in terms of volatility, and as more Americans get social security benefits, there’s a persistent need for the stability that bonds provide.”

The most popular funds, in terms of flows, suggest that investors are looking for safety and income rather than the kind of growth that comes with riskier categories of debt.

The most popular fund so far this year is the iShares iBoxx $ Investment Grade Corporate Bond ETF /zigman2/quotes/206919681/composite LQD +0.13% , which has seen inflows of $9.4 billion. That fund’s high-yield counterpart /zigman2/quotes/204471305/composite HYG +0.02%  has only had inflows of $7 million, although flows into the “junk bond” ETF tend to be volatile, given how investors use it as a short-term holding.

The investment grade fund is up 3.4% in the year to date, while the high-yield fund is up 2.5%.

The second-most popular fund of 2017 was another broad-based passive product, the iShares Core U.S. Aggregate Bond ETF /zigman2/quotes/200660887/composite AGG +0.04% , which has had $8.1 billion in inflows. That was followed by two other investment-grade bond funds, both from Vanguard, an intermediate fund /zigman2/quotes/202884162/composite VCIT +0.17%  and a short-term /zigman2/quotes/208462329/composite VCSH +0.07%  one. The pair had combined inflows of about $12 billion thus far this year.

The AGG is up 1.5% thus far in 2017.

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Among other notably popular funds, the iShares J.P. Morgan USD Emerging Markets Bond ETF /zigman2/quotes/202964510/composite EMB +0.37%  has had inflows of $3.2 billion, bringing its total assets to $11.6 billion. It is up 5.6% year-to-date.

“Emerging-market debt has been a very popular category this year, as it has a higher yield than U.S. debt, but it is largely investment grade,” Bartolini said.

The EM fund currently yields 4.49%, according to FactSet. The investment-grade fund has a yield of 3.16% while the Agg has a yield of 2.44%. The high-yield fund yields 5%.

The S&P 500 /zigman2/quotes/210599714/realtime SPX +0.72%  currently has a dividend yield of 1.88%, while the 10-Year Treasury /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -0.14%  yields 2.32%.

The bond ETF with the largest outflows thus far this year was the Pimco 0-5 Year High Yield Corporate Bond Index ETF /zigman2/quotes/205210165/composite HYS +0.15% . About $492 million has been pulled from that fund.

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Ryan Vlastelica is a markets reporter for MarketWatch and is based in New York. Follow him on Twitter @RyanVlastelica.

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