Short-term bonds dominate fixed-income ETF flows again in October — with a single fund getting outsize portion of investors’ money

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Ultra-short-term bonds were all the rage again in October, as investors in exchange-traded funds broadly favored fixed income over equities in a tough month for both asset classes.

Investors poured $13 billion into ultra-short-term government bond ETFs last month, the most popular category among U.S.-listed exchange-traded funds that target fixed income, said Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors, by phone. Investors had also favored short-duration funds in September and August, State Street found.

“It’s basically a yield and stability play,” said Bartolini. “Rates volatility is still extremely high.”

The bond market has been volatile this year amid a surge in Treasury yields, with steep losses in long-duration government debt in particular. Short-term bond ETFs have held up better, with ultrashort duration Treasury bills attracting investors with yields of more than 5%.

Ultra-short-term government bond funds provide “stable income” while “your volatility is basically close to zero,” said Bartolini.

In October, the SPDR Bloomberg 1-3 Month T-bill ETF
BIL
captured more than half the assets flowing into ETFs that hold ultrashort and short-term government bonds, with the single fund garnering $7.6 billion, according to Bartolini. 

Long-term government bond ETFs trailed with a total $5.5 billion of inflows last month, while intermediate-term funds attracted $2.9 billion, a State Street report written by Bartolini shows.

Short-term government bond ETFs this year have seen “a massive increase of usage” relative to their total assets under management, he told MarketWatch.

Ultrashort and short-term government funds, which in October saw their third-best month for inflows ever, have driven 35% of overall flows into bond ETFs so far this year despite comprising just 15% of total assets under management for fixed-income-focused exchange-traded funds, according to State Street. 

Bond ETF inflows surpass flows into equities

October was an unusual month for ETFs in that investors contributed more to fixed income than equities, according to Bartolini. 

Last month’s flows indicate a “risk-off attitude,” he said.

Bond ETFs attracted around $18.7 billion in October, compared with almost $16.3 billion for equity-focused exchange-traded funds, the State Street report shows. 

Read: Bond ETFs see ‘crescendo’ of investor demand after yield surge in volatile fixed-income market, says Invesco’s Paglia

Also see: Millennials seem to dig bond ETFs despite volatile fixed-income market, Charles Schwab finds

“Investors are really coming out of equities,” said Tim Urbanowicz, head of research and investment strategy at Innovator ETFs, in a phone interview. And “they’re scared to get longer out on duration in bonds,” he said. So, “they’re all piling into cash or the shorter-end of the yield curve,” where rates are “very attractive.”

According to State Street, equity flows were “muted” in October, with only U.S. stock ETFs seeing “meaningful flows while the rest of the regions had combined net outflows.”

Meanwhile, the SPDR Bloomberg 1-3 Month T-bill ETF, which has $39 billion of assets under management and invests in ultra-short-term Treasurys, has returned a total 4% this year through Wednesday, FactSet data show.

By contrast, long-term bonds have been hammered by the Federal Reserve’s rate-hiking cycle, which it began in early 2022 in an effort to tame high inflation in the U.S.

The iShares 20+ Year Treasury Bond ETF
TLT
has lost 12.1% this year through Wednesday on a total return basis. The ETF, which has $40 billion of assets under management, is on track for a third straight year of losses, FactSet data show.

The Fed announced on Wednesday that it’s holding its benchmark interest rate steady, at a target range of 5.25% to 5.5%, and maintaining what Fed Chair Jerome Powell described as a “restrictive” monetary policy as the central bank continues its effort to bring down inflation. 

Markets cheered, but…

Markets “cheered” the Fed’s “no-hike decision and comments from Chair Powell at his press conference as signs that the Fed has moved to the sidelines,” said Nicholas Colas, co-founder of DataTrek Research, in a note emailed Thursday.

“However, the word of the day was ‘persistence,’ as in ‘financial conditions need to remain persistently tight’ for the Fed to stay out of the game,” said Colas, referring to Powell’s remarks.

“That means they want to see long term rates stay high and equities to remain near current levels,” wrote Colas. “How much this caps any year-end rally is an open question.”

The U.S. stock market slumped in October, but has continued to rally in the wake of Powell’s comments on Wednesday. The SPDR S&P 500 ETF Trust
SPY,
which slid 2.2% last month, was up a sharp 1.9% on Thursday afternoon, bringing its year-to-date gains to more than 12%.

Shares of the iShares Core U.S. Aggregate Bond ETF
AGG
were up 0.6% on Thursday afternoon, but the fund was down around 0.9% for the year on a total return basis. The ETF, which has $89 billion of assets under management, lost a total 1.6% in October, FactSet data show.

As usual, here’s your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good…

…and the bad

New ETFs

• Roundhill Investments said in an email Thursday that it launched the Roundhill S&P Dividend Monarchs ETF KNGS, which tracks the performance of a group of U.S. blue-chip companies that have increased their dividends for more than 50 consecutive years.

• ProShares announced on Thursday the launch of ProShares Short Ether Strategy ETF SETH, a crypto-linked fund designed to provide investors an opportunity to profit from declines in the price of ether.

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