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A list of the five most popular exchange-traded bond funds on Monday tells you everything you need to know about what fixed income investors are worried about nowadays.
Cumulative inflows into the iShares Short Maturity Bond ETF (NEAR), Floating Rate Bond ETF (FLOT), SPDR Bloomberg Barclays Short Term High Yield Bond ETF (SJNK), PowerShares Senior Loan Portfolio (BKLN) and the Vanguard Short-Term Corporate Bond ETF (VCSH) topped $400-million (U.S.) in total for the first session of the week, the highest since the inception date of the most recent member of this product group.
One thing all these offerings have in common: low duration.
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Duration is a measure of interest-rate risk, and can be expressed in years or in terms of the expected change in a bond's price given a certain change in interest rates.
On the heels of the worst month for global bonds on record and less than 10 days away from an expected rate hike from the Federal Reserve, these flows are a sign that investors are increasingly wary of having too much interest rate risk in their fixed income holdings.
"Investors are making an orderly move to safer ground as the slow-moving tsunami of rising rates threatens longer-dated bond ETFs," said Eric Balchunas, ETF analyst at Bloomberg Intelligence.
"We've seen this 'duration rotation' a few times in the past five years, although those ended being false alarms."
The five ETFs investors flooded into on Monday include products that hold short-term and variable-rate bonds, which both tend to be relatively well-insulated from interest rate risk.
Long-term and low-risk bonds typically have the highest duration risk.
Fittingly, Vanguard's Long-Term Bond ETF (BLV) – whose top 19 holdings are U.S. Treasury bonds maturing in 2040 or later – experienced over $70-million in outflows on Monday, the most withdrawals among fixed-income offerings.