Investors Are Piling Into This 'Boring' Asset For Gains

Bonds have been far from boring this year — at least compared with the S&P 500. And investors are piling into bond ETFs as a result.

Investors plowed $14.1 billion into U.S. bond ETFs during the week ended March 13, says ETF.com. That’s more than half of the $27.3 billion that flowed into all ETFs during the week.

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And the surge of interest in bond ETFs is only heating up. Just one type of bond ETF — inflation-linked bond ETFs — took in inflows of $600 million in March, says State Street Investment Management. That puts this month on pace to mark the 12th month out of the last 13 that inflation-linked bond ETFs posted inflows. These ETFs pulled in $11 billion during this time.

“Given the current geopolitical uncertainty, investors are turning to bond ETFs for stability,” says Todd Rosenbluth, director of research at TMX VettaFi. “Bonds offer appealing diversification traits, including capital preservation and income generation.”

Looking At The Top Bond ETFs

Investors didn’t have to delve into arcane areas of bond funds to find returns. The broad $139.8 billion-in-assets iShares Core US Aggregate Bond ETF (AGG) has returned 0.6% this year. That might not sound like much until you consider the S&P 500 has a negative return this year of nearly 2%.

And much larger bond ETFs gains are possible for those who look around. The $56.9 million-in-assets Simplify Bond Bull ETF (RFIX) returned more than 15.1% this year. That makes it the top-performing actively traded bond ETF this year, says Morningstar Direct.

The bond ETF is built to amplify price gains from bonds during periods of falling long-term interest rates. It also profits from heating up volatility in the bond market. The fund is designed to work much like owning long-dated call options on U.S. Treasuries.

Riding The Convertibles

Another hot theme in bond ETFs is convertible bonds. These specialized debt instruments blend the stability of bonds with the upside potential of stocks.

Convertible bonds typically allow holders to convert the bonds into shares of the company’s stock at a prearranged price. This conversion feature is what allows convertible bonds to periodically outperform many other bonds.

Take the $5.5 billion-in-assets iShares Convertible Bond ETF (ICVT) as an example. It has returned 6.25% this year. And it has returned 16.2% annually in the past three years. That’s a stock-like return not far behind the 21.4% annualized return of the S&P 500 in the past three years.

The largest positions in iShares Convertible Bond are firms that not only can easily service their debt, but offer potential upside in their businesses. The ETF’s top holdings are securities from high-speed networking equipment maker Lumentum (LITE), computer storage maker Western Digital (WDC) and bitcoin play Strategy (MSTR).

Not far behind is $5.2 billion-in-assets State Street SPDR Bloomberg Convertible Securities ETF (CWB). The fund returned 5.5% this year and 15.2% annually in the past three.

The bond ETF rally and flows indicate how this asset class is well-positioned in a time of uncertainty.

“While many people focus on U.S. Treasuries and investment-grade corporate bonds, there are many other investment styles available through ETFs,” Rosenbluth said. “However, it is important to note that investors should be careful not to stretch for yield and overextend their portfolios without appreciating the potential downside risk.”

Top Performing Bond ETFs This Year

Among actively traded funds

Sources: Morningstar Direct, S&P Global Market Intelligence, MarketSurge

Follow Matt Krantz on X @mattkrantz

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