Equity and bond ETFs in the US barely reacted to two big pieces of market news over the last week, although industry experts have pointed to possible movement of municipal bond ETFs.
It was announced that Federal Reserve Governor Jerome Powell has been nominated as the next Fed chairman, replacing Janet Yellen. The second announcement is the Republican’s tax plan, called the Tax Cuts and Jobs Act, which cuts corporate tax from 35% to 20% and consolidates individual tax brackets from seven to four.
ETFs show no surprise
The muted reaction is a typical one during times of record-low volatility and record-high markets. Large ETFs like the SPDR S&P 500 ETF (SPY) and the iShares Aggregate Bond ETF (AGG) barely moved, continuing positive returns year to date.
Experts said the lack of surprise in the announcements were key in explaining the markets’ reaction. Brian Jacobsen, chief portfolio strategist for Wells Fargo Funds Management, told ETF.com that muni ETFs like the iShares National Muni Bond ETF (MUB) may see some movement as tax changes are set to affect this sector.
“The municipal bond market will be the place to look for a reaction, as there are provisions galore that could affect that market. Eliminating the AMT, changing private activity bond income treatment, eliminating stadium bonds, and taxing income on advanced refunding bonds could create some really interesting relative opportunities in that market,” he said.
Record ETF inflows year to date
Despite smaller pockets of the market potentially being affected, broad markets continued towards new record highs. FactSet data showed that ETFs in the US gained $54.9 billion in October, and around half of those flows were directed to the 10 most popular ETFs in the US.
Year-to-date inflows are at an annual record of $385 billion, with international equity ETFs attracting $137 billion in net creations.
With the promise of tax reform, there is little sign the market rally will slow down. However, long-dated bonds were not so popular as investors anticipate another interest rate hike. The iShares 20+ Year Treasury Bond ETF (TLT) lost more than $1.3 billion last month.