Bonds: Total Market

Research from Morningstar's annual Global Fund Flows found that actively managed fixed income funds saw $422 billion in outflows during the first half of the year. That figure accounted for 74% of all outflows from active portfolios. Active funds as a whole saw $568 billion in outflows, while index funds generated $432 billion in inflows. The net difference of $136 billion in outflows was the most since June to December of 2008, during the height of the Financial Crisis. The high percentage of active fixed income outflows is partly a result of the automatic rebalancing of model portfolios and target-date funds. Since equity returns have been more negative, automatic rebalancing has been triggering more trades to equity strategies to get allocations back in line. Passive fixed income funds saw $90 billion in inflows.


Finsum: Active fixed income funds accounted for 74% of all outflows from active portfolios during the first half of the year as automatic rebalancing favored equity strategies.

According to a paper published last month by Christopher Reilly of Boston College, corporate bond ETFs listed in the US, on average, pay 48 basis points a year in hidden costs that result from custom creation baskets. Since most fixed ETFs track thousands of individual bonds, custom creation baskets allow issuers and authorized participants to create a sample of the holdings which mirror the performance of the ETF. An authorized participant is an organization, typically a bank, that manages the creation and redemption of ETF shares in the primary market. Without sampling, the authorized participants would have to source every security. However, the custom ETF creation baskets allow authorized participants more flexibility to include securities that could significantly underperform the underlying index. This customization results in hidden costs that investors of ETFs could incur.


Finsum: Corporate bond ETFs are paying an average of 48 basis points a year in hidden costs resulting from customized creation baskets.

The ETF sell-off is rampant as a response to the wild and sudden market volatility, but its time to get rid of your fixed income funds? Some experts are saying there is a breakdown in the traditional 60-40 portfolio, but outflows aren’t present yet at the rate in bond funds. This is despite funds like AGG being down over 10% YTD. One possible reason for this is that investors are more worried about macro factors than most other factors. Over a third of advisors are worried about inflation, rates, and geopolitics whereas only one in ten are as concerned with volatility. This is could cause a shifting of flows into more stable macro flavored products like bond funds.


Finsum: We’ve said it once we can say it again, bond fund holders aren’t eyeballing returns like equity ETFs they are holding for security. 

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