Bond ETFs have seen strong inflows across most categories during the first six months of the year despite almost universally negative performance over the period, as investors continue to struggle to find diversification and predict the direction of markets.
Over the six months to 30 June, only one category of the 21 segments represented in bond ETFs – European Government Bonds – saw net outflows, according to TrackInsight data, shedding €16.8m.
However, this pales in comparison to the scale of inflows seen into many other categories, with Developed Bonds ETF taking in a staggering €62bn over the period, while Investment Grade Bonds attracted €54bn and US Bonds drew in €48bn.
However, investors may now be regretting their choices, as each of these categories has seen negative returns over the six months, of -4.63%, -4.85% and -5.55%, respectively.
Meanwhile, European Government Bonds had actually not suffered as much underperformance as some peers, falling by 0.84% over the six months. The only bond category that managed to deliver a positive return were European Corporate Bond ETFs, which were up 0.46%, while the worst performers were ETFs linked to US Government Bonds, which tumbled 6.2% on average.
The strong inflows into bond ETFs this year are a continuation of the trend seen in 2016, when bonds emerged as the overall winner in terms of asset flows. European-listed fixed income ETFs drew in a net €19.1bn over the period, according to Thomson Reuters.
However, with performance suffering, investors might be expected to start taking money out of bond vehicles to invest elsewhere. The interest rate hiking cycle of the US Federal Reserve might have also dissuaded inflows, with another 0.25% increase taking place in its June policy meeting, but US Bonds emerged as one of the most popular ETF categories over H1 2017.
One of the drivers behind the demand for bonds could be a pessimistic outlook on the global economy and markets, which is increasingly shared by many in the investment community.
For example, famous investor Jim Rogers has recently warned that we are going to see “the worst crash in our lifetime” in the near future, fuelled by ballooning Chinese debt, while others are positioning portfolios defensively to mitigate losses if markets tumble.
However, flows into stock markets have also shown no sign of slowdown, with Global Stock ETFs taking in a cumulative €46bn during the first six months of 2017, according to TrackInsight’s data. Technology stocks have been the most popular sector, drawing in some €4bn over the period.