ETFs
The rise of active bond ETFs could put total inflows on track to hit $1 trillion a year
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Investors are pouring huge sums into exchange-traded funds (ETFs) that invest in a range of hand-picked bonds, with record inflows since January pushing the sector toward its first annual $1 trillion haul.
Actively managed fixed income securities AND F raked in $7 billion in June and has raised $41 billion in the first half of 2024, surpassing the record of $33 billion for the full year in 2023, according to data from State Street Global Advisors, the third-largest U.S. ETF issuer.
Most investors think of passive equity strategies like index trackers when they think of ETFs — such as those made popular by SSGA, Vanguard and BlackRock, which make up the bulk of the market — but active ETFs and bond ETFs in particular have captured a growing share of new investor money in the $9 trillion U.S. ETF industry.
“I don’t see this momentum slowing down,” said Matt Bartolini, head of SPDR Americas research at SSGA. “In fact, I see it strengthening” as companies develop longer track records that attract investor interest, he added.
They’ve been helped by interest from retail investors, especially younger investors, and a 2019 rule change from the Securities and Exchange Commission that simplified the process for launching new ETFs and paved the way for active ETFs. ETF managers also benefit from actively managed offerings, because they’re about three times more expensive on average than their passive counterparts, according to the Investment Company Institute.
Actively managed ETFs benefited record flows this year Actively managed mutual funds, which account for the bulk of new fund launches, continue to lose billions of dollars month after month. They also tend to charge lower fees, on average 11 basis points less than their mutual fund counterparts, according to ICI.
Dave Nadig, a longtime ETF industry observer, noted that it has been nearly four years since an all-time high was reached in the most widely used U.S. bond index, the Bloomberg U.S. Aggregate Bond Index, or simply “the Agg.”
“That’s a long time for an index to be this boring, so obviously investors are going to look for any chance to beat it,” Nadig said.
In total, U.S. ETFs raked in more than $80 billion in June, for a total of $411 billion in the first six months of the year, according to SSGA. The calendar-year record is just over $911 billion in 2021.
ETF flows are typically higher in the second half of the year, partly due to year-end reshuffles maximize tax benefitsBartolini said it was possible the U.S. ETF industry could enjoy its first year of $1 trillion inflows, adding that the chances of reaching $1 trillion would improve if the Federal Reserve cuts rates and fuels a year-end “Santa Claus rally.”
“It would have to be a massive December,” Bartolini said.