Capital into Government Debt and out of Corporate Debt 

European fixed income ETFs gathered net inflows of USD$577 million[i] last week (from April 18th to April 22nd) and USD10.5 billion year-to-date. High yield bond ETFs recorded total net inflows of USD$10 million and were dwarfed by investment-grade bond ETFs. The latter had the lion’s share with net inflows of USD$542 million. Yet Treasury yields have shot higher this year amid red-hot inflation. Bond prices have dropped accordingly as the Federal Reserve has embarked on rate tightening and liquidity normalization. As bond prices have an inverse relationship with interest rates, the return that investors expect to gain from debt products increases. This has rendered government bonds a bit more attractive to investors.

 Issuer data shows that European investors favored Treasury ETFs and Agency bond ETFs. Their net inflows reached USD$480 million last week. Meanwhile, ETFs tracking corporate debt faced a wave of selling with outflows totalling USD$11 million.

Government Bond ETFs

Last week’s winner was the iShares $ TIPS UCITS ETF (ITPD). It lured USD$318 million in net inflows. This passively managed fixed income fund was launched recently (on February 23rd, 2022). ITPD, the largest recipient of flows, seeks to track the performance of the Bloomberg US Government Inflation-Linked Bond Index. The fund allows investors to diversify their portfolios through inflation-linked bonds with a geographic focus on the United States. As its name indicates, ITPD invests all its assets in US Treasuries. The fund’s 46 holdings have a weighted average coupon of 0.76%[ii] and a weighted average maturity of 8.23 years. Its TER is 0.10%, and it trades on the Borsa Italiana exchange.

Corporate Bond ETFs

The iShares Core € Corp Bond UCITS ETF (IEAC) lost the most assets among all fixed income ETFs domiciled in Europe last week. The fund seeks to replicate the performance of the Bloomberg Euro Corporate Bond Index. The index contains fixed-rate, investment-grade Euro denominated corporate bonds from the industrial, utility, and financial issuers only. Inclusion is based on the currency of the issue, not on the issuer’s domicile. The fund invests in 3,417 underlying securities with an effective duration of 4.94 years. Its assets are globally diversified with a 20.59% exposure to France, 19.12% to the US, and 14.01% to Germany, while the rest is spread across 11 countries. IEAC is less diversified in terms of credit quality, with a 55.73% allocation to BBB-rated bonds and a 37.07% exposure to A-rated bonds. In terms of sectors, almost one-third of the portfolio is composed of bonds issued by banks. The remainder is spread across industrials, utilities, and financials. IEAC charges 0.20% a year and trades on the London Stock Exchange.

ETFs in play:

• Government bond ETFs
• Corporate bond ETFs

[i] Flow data is as of April 22nd, 2022.

[ii] Fund characteristics data is as of April 27th, 2022.

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