No matter what you hear about investors dumping bonds, sales of bond ETFs are doing just fine.
First-quarter money flows into exchange-traded funds show fixed-income funds grabbing more than $1.8-billion in assets, according to National Bank Financial. That’s a modest amount in comparison with, say, the $5.1-billion taken in by Canadian equity funds. But in some of the worst conditions ever seen by many for bonds, investors are still adding fixed-income funds to their portfolio.
The clear preference for ETF investors is the aggregate bond ETF, which includes both government and corporate bonds maturing in the near, medium and long term. These funds were down close to 8 per cent for the year through early April, but they offer cheap, efficient access to the entire bond market in a way that suits long-term investors willing to take the pain in a rising rate cycle and then reap the gains of falling rates. The bond market slump of 2022 is all about the rise of rates in response to persistent inflation.
March was a particularly decent month for bond ETFs, given how the narrative of sinking bond prices has taken hold. NBF said the monthly inflow was the largest so far in 2022. Among the bond ETFs with the highest inflows were the Horizons Canadian Select Universe Bond ETF (HBB-T) and the BMO Aggregate Bond Index ETF (ZAG-T).
Singled out by NBF for their outflows were corporate bond ETFs, including the BMO Short Corporate Bond Index ETF (ZCS-T) and the BMO Mid Corporate Bond Index ETF (ZCM-T). Long-term bond ETFs also saw outflows, as did preferred share funds. Preferred shares offer fixed income through their quarterly dividend payments, but they behave more like stocks than bonds.
The rate outlook has tilted recently to higher, faster increases in borrowing costs, and that suggests more downside for bond ETFs. Two thoughts on why investors are still buying these funds: To hedge against declines in a stock market that has been shaking off a lot of bad news lately, and to lock in yields that are well higher than 12 months ago.
The yield on the FTSE Canada Universe Bond Index was a bit more than 3 per cent in early April, double what it was in winter 2021.
-- Rob Carrick, personal finance columnist
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