Investors Like These Bond ETFs, Too

Investors are loving fixed income exchange traded funds this year. An oft-mentioned anecdote in this space has been that six of this year's top 10 asset-gathering ETFs are bond funds and that remains the case. In fact, the third and fourth ETFs in terms of new assets added this year are bond funds.

A cursory glance would indicate that investors' affinity for fixed income ETFs has mostly been directed at U.S government and high-yield corporate bond funds. However, an increasingly sanguine outlook for Federal Reserve action, or lack thereof, on interest rates this year is drawing plenty of income investors to municipal bond ETFs.

Rebounding oil prices are helping as there has been concern that some municipalities dependent on oil for revenue could be sapped by low oil prices. That has not yet permeated the broad municipal bond market as investors are flocking to ETFs such as the iShares National Muni Bond ETF MUB and the SPDR Nuveen Barclays Short Term Municipal Bond SHM.

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“Increased investor appetite for treasuries has also meant that the excess of muni fund flows over treasury fund flows narrowed over the past few months but still favour munis as the asset class continues to see strong inflows,” said Markit in a recent note. 

Year-to-date, MUB and SHM have added $389.2 million and $185.6 million, respectively in new assets. Investors' enthusiasm for SHM is understandable as the ETF has a modified adjusted duration of just 2.8 years, limiting its sensitivity to rising interest rates. SHM has a 30-day SEC yield of just 0.67 percent, but that's better than most savings account and there is little credit risk in this ETF as essentially all of the fund's holdings are rated AAA or AA.

Comparing munis against Treasurys reveals the former might be the better for bond investors right now.

“A high muni/treasury ratio implies munis are more attractive than treasuries given that the historical muni/treasury ratio has been around 0.80. As of 17^th March, muni/treasury ratios show the 10-yr is currently 0.98 and the 30-yr 1.06,” adds Markit.

Investors have also displayed a thirst for high-yield munis with the Market Vectors High-Yield Municipal ETF HYD. HYD has added nearly $242 million in new assets this year.

The $2 billion HYD carries a 30-day SEC yield of 4.3 percent. Although this is a high-yield fund, almost 35 percent of its holdings carry investment-grade ratings and over 36 percent are rated BB or B.