With record inflows, bond ETFs see surge in investor interest

Key points

• Bond ETFs have seen record inflows this year.

• The interest in bond ETFs is spurred by lower interest rates.

• Investment managers have introduced 120 new bond ETFs this year, 52% more than last year.

Bond ETFs have seen a record amount of inflows, spurred by rate cuts.

With interest rates on the decline, bond ETFs have become increasingly popular among investors as 2024 is already a record year for inflows.

According to State Street Global Advisors’ Matthew Bartolini, head of SPDR Americas Research at SPDR Exchange Traded Funds, bond ETFs have generated $215 billion in inflows through the first nine months of 2024.

That breaks the calendar year record for bond ETF inflows, surpassing the $213 billion in inflows in 2021. Notably, 2024 inflows broke the record in just nine months and are on pace, according to Bartolini, to reach $280 billion by the end of 2024.

Bullish on bonds

Interest in bond ETFs has been spurred by lower interest rates, because bond prices rise when interest rates fall. Returns are even better when interest are high, like they are now, and begin to fall, because you get the benefit of high coupon yields and the increase in the bond’s market value once rates come down.

In August, $31 billion flowed into bond ETFs, according to Morningstar, which is roughly the same amount that flowed into stock ETFs last month. And in the week before the Fed cut rates, bond ETFs had higher inflows, $8.6 billion, than equity funds, $3.8 billion.

PIMCO Active Bond ETF Portfolio Manager David Braun said this is the most bullish he has been on core bonds in 15 years.  

“The all-important starting yields are higher than they’ve been for a long time and interest rates are likely ready to come down, starting in the second half of 2024 and continuing into next year. That’s the combination we’ve been waiting for,” Braun said in recent commentary.

William Ahmuty, head of SPDR ETF Fixed Income at SSGA, said recently that he expects to see the some of the $1.2 trillion that flowed into money market funds last year start to move into bond ETFs as rates come down.

“Active core bond ETFs as well as a mix of short and intermediate investment-grade bond ETFs will likely see inflows from investors seeking reliable income with greater stability,” Ahmuty said in recent commentary.

To that point, roughly 40% of all flows into bond funds went into actively managed bond ETFs in September, which is well above the 14% average.

New bond ETFs meet demand

Investment managers have been anticipating this spike in interest in bonds, as they have been rolling out new bond ETFs by the dozen.

Already this year, 120 bond ETFs have been launched, according to Strategas, which is roughly 52% more than were introduced through the first nine months of 2023.

And this month, reported Reuters, 46% of all new ETF launches were bond ETFs, up from the average of 20% for the full year.

Vanguard, in fact, just announced plans to launch two new actively managed bond ETFs by the end of the year, the Vanguard Core Bond ETF and the Vanguard Core-Plus Bond ETF to capitalize on this trend.

Bond ETFs probably won’t provide the type of returns as certain stock ETFs, but they should offer competitive returns at a much lower risk level, providing some nice balance for investors during what could be a volatile stock market.