Bond ETF flows this year just topped annual record set in 2021

By Christine Idzelis

The U.S. bond market is on track for a fifth straight month of gains in September

Investors are flocking to bonds this year, with exchange-traded funds that focus on fixed-income assets exceeding their annual record in the wake of the Federal Reserve's big interest-rate cut.

Bond ETFs that are listed in the U.S. have raked in $215 billion this year through Tuesday, surpassing the record $213 billion garnered in all of 2021, according to Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors.

"Fixed-income ETFs are being adopted at a higher rate than they have been historically," Bartolini said in a phone interview Wednesday. "It's going to be an ongoing source of growth for the industry."

Investor demand for actively managed bond ETFs in particular has been strong in September. State Street found the category has seen about $10 billion of inflows this month through Tuesday - already breaking its record monthly haul of $9.9 billion in July, according to Bartolini.

In a sign of their growing popularity among investors, active bond ETFs have accounted for around 40% of all fixed-income flows into exchange-traded funds this month through Tuesday - well above their 14% market share as fixed-income ETFs that passively track indexes continue to dominate based on total assets under management, he said.

Bonds have rallied in 2024, as investors anticipated that easing inflation in the U.S. helped set up the Fed to start cutting interest rates. The Fed kicked off its rate-cutting cycle last week.

The iShares Core U.S. Aggregate Bond ETF AGG, which provides broad passive exposure to the U.S. investment-grade bond market, has gained about 4.5% this year on a total return basis through Wednesday. The popular bond ETF, with $121 billion of assets under management, is on pace for a fifth straight month of gains in September, according to FactSet data.

Meanwhile, Vanguard Group's Chief Executive Salim Ramji is eyeing fixed income as he considers ways the giant asset manager's strategies may evolve under his new leadership.

Fixed income is much larger than the equity market - but it's also more "antiquated," less transparent and less efficient, Ramji said Wednesday on stage at the Future of Asset Management North America conference hosted by the Financial Times in New York. He pointed to opportunities for active management in the bond market, saying Vanguard will stay focused on providing investors fixed-income exposures at a low cost.

Fixed-income assets will become more important as people retire, Ramji told the audience.

Ramji, who started his new role as CEO of Vanguard in July, previously worked at the world's largest asset manager, BlackRock, as global head of ETF and index investments.

Read: How Vanguard stacks up against BlackRock in ETFs as new CEO Salim Ramji steps in

Both BlackRock and Vanguard launched actively managed bond ETFs last year.

For example, the actively managed Vanguard Core-Plus Bond ETF VPLS, which has flexibility to invest beyond the U.S. and in below-investment-grade securities, launched in December and has around $242 million of assets under management, according to FactSet data. The fund is up 5.5% on a total return basis in 2024 through Wednesday.

The BlackRock Flexible Income ETF BINC, launched in May 2023 to actively invest in fixed-income assets globally, has gained a total of 5.8% so far this year, according to FactSet data. The fund has about $5 billion of assets.

As for the cost of the active bond ETFs, the Vanguard Core-Plus Bond ETF has an expense ratio of 0.2%. The BlackRock Flexible Income ETF currently has a net expense ratio of 0.4%, as it's waiving a portion of its 0.5% management fee through June 30, 2025, according to its prospectus.

Meanwhile, the actively managed SPDR DoubleLine Total Return Tactical ETF TOTL, a slightly more expensive bond fund with a 0.55% expense ratio, has gained a total of 6.4% in 2024 through Wednesday. The fund, which began trading in 2015, has around $3 billion of assets under management.

-Christine Idzelis

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09-25-24 1636ET

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