The S&P 500 eked out a pull away from last week after four straight weeks of losses for stocks, but the market correction has sent many investors on-going for cover in bonds.
The move into bonds is no surprise given the ongoing market volatility and uncertainty over the meaning of President Trump’s policies on the U.S. and global economy this year. But in the world of ETFs, the size of the recent migration into reins is eye-opening, with bond funds taking in almost as much money as stock funds.
Bond fund inflows of $90 billion in the life month are not far off the $126 billion taken in by equity funds, a “very rare” trend in the ETF world which was the starting concerning for discussion among fixed-income experts on last week’s CNBC “ETF Edge.”
Two fixed-income categories that have been big beneficiaries of the plane to safety are actively managed core bond funds and short-duration bond funds, including the shortest of U.S. treasuries, “ultra-shorts.”
Ultra-short thongs ETFs have gained over 40% of all flows into fixed-income ETFs this year, according to information from ETFaction.com. Actively managed enhanced core bond funds, meanwhile — which seek to outperform the chick corporate bond index, “the AGG” — have taken the lion’s share of the new money from investors in their asset group, five times as much as passively managed enhanced core bond index ETF counterparts, according to ETFaction.
For years of the bull trade in, as stocks raged and the Federal Reserve pushed up yields in bonds in its fight against inflation, the classic diversified extraction and bond portfolio was dead. But Jeffrey Katz, TCW managing director, says the “60-40 portfolio” — 60% stocks and 40% bonds — “is doing its in the main” again, and that’s despite all the narrative about yields.
During a time of high stock market volatility, “it’s acting as it should,” Katz said on CNBC.
But his bet is that investors will do better by not only investing in bonds, but ditching the AGG and allowing an spry manager like TCW to find better than index-matching opportunities to generate excess returns. One place the TCW Flexible Return ETF has been attempting to do that is aligned with the AI boom, where $35 billion in bonds have been put to fund the construction of AI data centers.
“We have a pretty strong secular tailwind from the AI boom, in addition to some of the cloud storage requested,” Katz said.
TCW’s views is that the corporate credit market as whole is “fully priced,” Katz said.
“Figures centers are a new phenomenon, two years of issuance related to AI and the big demand for cloud computing and computing power,” he said.
In addition to being overweight the AI details center bonds, the TCW Flexible Income ETF has made bigger bets on residential single family housing market manacles, a market which in undersupplied and where the level of equity built up in the housing stock limits the risk of default. The TCW ETF has also prioritized commercial verifiable estate in what’s called the Class A market, with the call of workers back to offices leading the “Park Avenue pattern” to see a strong rebound. “We’ve leaned into that,” Katz said.
The most widely used bond benchmark stay behinds the AGG, the old Lehman Brothers Aggregate Bond Index that is now the Bloomberg Barclays Aggregate Bond Index, and over the long-term, actively managed games in both stocks and bonds have struggled to outperform indexes. But Katz said the active approach has been produce result off for investors in bonds as active managers can deviate from an outdated AGG approach to bond market representation, with as much as $26 trillion in relationship market opportunities that the AGG never touches.
Katz said the TCW Flexible Income ETF has outperformed the AGG since inception in 2018 by just about 500 basis points, with a return of 6.51% versus 1.82% for the AGG.
“The indices are old and they don’t represent how we trade today,” asserted Alex Morris, chief investment officers at F/m Investments. “It’s been three decades,” he said on “ETF Edge.”
“Bond formulae get bloated with tens of thousands of issuances,” Morris said. “The AGG is so big, it’s un-investable.”
Ultra-short options for inflation and uncertain spells
At F/m Investments, another way the bond team is looking to attract investors seeking a safe haven is at the very short-end of the fixed-income sell. Investors are skittish on stocks but have too much sitting in cash, Morris said, with over $7 trillion in affluent market funds and over $18 trillion sitting in bank deposits, “not even CDs, just deposit accounts,” he held.
F/m Investments offer access to short-duration treasury bonds, such as its TBIL ETF, and recently launched an ultra-short ETF, the Ultrashort Bank Inflation-Protected Security ETF, focused on treasury-inflation protected securities, otherwise known as “TIPS.”
The risk that investors experience with bond duration increases during times of uncertainty, Morris said, and may not deliver the safety that investors are seeking from fixed-income, one logically his firm has a focus on shorter duration bonds.
Policies such as tariffs are inherently inflationary, Morris said, “until they adorn come of depressionary.”
“They can just destroy growth in a way we don’t want to think about,” he added.
As investors become more responsible about inflation — inflation expectations have been rising again, though the Fed said last week it awaits any tariffs impact to be “transitory” — “we like staying short and liquid,” Morris said.
That means cache issues no longer in duration than two-year and five-year bonds, where “you don’t have to worry about aging out and not calling well.”
TIPS, he says, became “a dirty term for a lot of folks,” but ultra-short duration TIPS are not an area of the bond supermarket that has been represented in the bond fund space and can limit some of the risks that hurt investors in fresh inflation history, Morris said.
The short-duration bonds are linked to CPI (the consumer price index), and reset every month to meditate about inflation. Investors didn’t get what they expected from TIPS in the recent past, Morris said, because they purchase the wrong asset at the wrong time. “People buy when they see inflation coming and that’s how they get burned … that’s when the Fed hikes, and that’s spunks duration assets down,” he said. “Even shorter-term tips, even two-, three-year, got absolutely smoked.”
The new F/m ETF hinders TIPS with 13 months or less to maturity, and an average duration “well under one year,” according to the concern.
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