Money managers are flocking to extremely precise fixed-income exchange-traded funds as a hawkish central bank and economic uncertainty batter the bond market.
(Bloomberg) — Money managers are flocking to extremely precise fixed-income exchange-traded funds as a hawkish central bank and economic uncertainty batter the bond market.
Assets in BlackRock Inc. and Invesco Ltd.’s maturity-focused bond ETFs, which hold debt maturing in a certain year, have soared to all-time highs this year, data from the issuers show. BlackRock’s iBonds lineup now holds over $22 billion, while Invesco’s BulletShares suite of funds isn’t far behind with over $16 billion.
The highly specific ETFs were once niche products with a couple billion dollars between them a decade ago. In recent years, they have ballooned amid sticky inflation and the Federal Reserve’s historically aggressive campaign to cool it. That backdrop fueled volatility across fixed-income markets as yields rocketed higher over the past year. As a result, money managers and financial advisers are hyper-focused on managing interest-rate risk in portfolios, according to VettaFi’s Dave Nadig.
“Advisers and quasi-institutional folk are all about balancing credit and duration risks on the head of a pin right now,” said Nadig, financial futurist at data provider VettaFi. “Almost literally every conversation I have with an adviser is about what the heck to do about the bond portion of their portfolio.”
Managing duration risk — a measure of sensitivity to rate changes — has taken on a increased urgency over the past year after policymakers lifted rates by 500 basis points from rock-bottom levels over 10 consecutive hikes. Benchmark 10-year Treasury yields currently stand near 3.7%, after entering March 2022 near 1.7%.
Financial markets were dealt another harsh lesson about the dangers of duration this past March. Silicon Valley Bank’s portfolio of long-dated Treasuries — accumulated when rates were still pinned at ultra-low levels — played a starring role in the lender’s stunning collapse.
The heightened focus on rate risk has benefited BlackRock and Invesco. The Invesco BulletShares 2024 Corporate Bond ETF (ticker BSCO) is the category’s heavyweight with $3.9 billion in assets, followed by the $2.9 billion iShares iBonds Dec 2023 Term Treasury ETF (IBTD).
In the case of the iBonds and BulletShares products, when the securities held by the ETF reach their maturity date, the fund shuts down. BlackRock has launched 64 such funds since 2010, 30 of which have reached maturity. Invesco has created 57 duration-focused funds since its first debuted in 2010, 28 of which are still trading.
The demand for these bond funds — particularly ones that hold shorter-dated debt — has also been a boon for startup ETF issuers. The US Treasury 3 Month Bill ETF (TBIL) has collected over $1 billion since launching last August, leading F/m Investments’ stable of single-maturity bond funds.
Meanwhile, BondBloxx Investment Management LLC’s duration-focused funds have attracted cash as well. The BondBloxx Bloomberg Six Month Target Duration US Treasury ETF (XHLF) has already reached about $758 million in assets after launching in mid-September.
“Buying a portfolio of securities, for any investor, for any investment management firm, is a lot of work,” Bondbloxx co-founder Joanna Gallegos said in a Bloomberg Radio interview. “ETFs give you that exposure with one trade, one click, it settles in your account. It’s very simple for asset managers and investment managers to use them for that exact exposure.”
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