US bond ETF launches 50% from year-ago level By Reuters

By Suzanne McGee

(Reuters) – Bond-focused exchange-traded fund launches nearly doubled from year-ago levels in 2024, boosted by expectations of interest rate cuts by the Federal Reserve, according to CFRA and Strategas data.

Nearly 120 bond ETFs have been launched so far this year, compared with 79 since the end of September 2023, Strategas data shows.

The number of launches increased this month, with bond products accounting for 46% of all ETF debuts, according to CFRA. That compares to an average of about 20% of all launches through 2024. The new products run the gamut from those offering exposure to municipal bonds to others focused on high yield and secured loan obligations.

“There are some issuers who realize that fixed income is going to be a very big trend in general and that there is a unique opportunity to add a product to the market that would be a more creative alternative to large bond index ETFs. ,” said Todd Sohn, head of ETF analysis at Strategas.

A key factor driving interest this year has been anticipation that the Fed will cut interest rates in 2024 — a process that began with a 50 basis point cut last week. Officials have penciled in another 150 basis points in cuts through the end of 2025, according to the Fed’s latest Summary of Economic Projections.

Falling interest rates are seen as good for bonds because they tend to push yields down, which move inversely to bond prices. Investors have also been keen to lock in yields near multi-decade highs before they fall.

The benchmark recently stood at around 3.75%, down from a high of just over 5% last October.

Issuers were also encouraged by growing flows into bond ETFs. Average monthly net flows into U.S. bond ETFs hit a record $25 billion this year, up from $17.1 billion in 2023, Strategas data showed. September flows totaled $22.9 billion as of Sept. 20, according to Trackinsight, a Paris-based firm that monitors the global ETF industry.

The bond ETF space is dominated by the iShares Core US Aggregate Bond ETF and the Vanguard Total Bond Market ETF, each with roughly $120 billion in assets. These two passive bond funds track the Bloomberg US Aggregate Index and a float-adjusted version of that index, respectively. However, many of the sector’s newer funds, including much of this year’s launches, are actively managed, with managers picking which stocks they think could beat a benchmark.

“Fixed-income investors have a long-standing preference for actively managed products,” said Scott Davis, head of ETFs at Capital Group, noting that nearly 80% of all fixed-income mutual funds fall into this category. Unlike mutual funds, ETFs are traded on an exchange throughout the day and offer instant liquidity.

One of the biggest asset management firms to make a push into ETFs in the past few years, Capital Group launched its $1.2 billion Capital Group Core Bond ETF in September 2023.

New products debuting in recent weeks are from the Rockefeller Opportunistic Municipal Bond ETF, which seeks long-term returns from an actively managed portfolio of munis, and the Congress Intermediate Bond Fund and two packages of “long-term income” ETFs from Stone Ridge Asset. Retirement oriented management and reliable income promise for the over 80s.

Signs of a rebound in inflation or stronger-than-expected growth could reduce the outlook for how deeply the Fed cuts interest rates, potentially hurting fund yields.

For now, however, issuers are betting that the trend in the sector will continue.

Fixed income “was the logical territory to watch next, now that the equity index fund space and even active stocks have become more crowded,” said Aniket Ullal, head of ETF research and analysis at CFRA.