US Bond ETF Launches Jump 50% Compared to Last Year, According to Reuters

By Suzanne McGee

In 2024, the launch of bond-focused exchange-traded funds (ETFs) has surged significantly compared to last year, driven by expectations of interest rate cuts from the Federal Reserve, according to data from CFRA and Strategas.

So far this year, nearly 120 bond ETFs have debuted, up from 79 by the end of September 2023. The number of bond ETF launches has notably increased this month, with these products accounting for 46% of all ETF introductions, compared to an average of around 20% throughout the year. The new offerings range from those providing exposure to municipal bonds to those focusing on high yields and collateralized loan obligations.

Todd Sohn, head of ETF analysis at Strategas, commented that many issuers recognize the potential for fixed income to become a major trend and see a unique opportunity to introduce innovative products that serve as alternatives to traditional broad bond index ETFs.

A significant factor behind the renewed interest in the bond market this year is the anticipation that the Federal Reserve will implement interest rate cuts, with a 50 basis point reduction already occurring last week. Projections indicate an additional 150 basis points of cuts may follow by the end of 2025.

Falling interest rates generally benefit bonds, as they lead to lower yields, which inversely affect bond prices. Additionally, investors are keen to secure yields that are currently near multi-decade highs before they decline further.

The benchmark yield was recently around 3.75%, a decrease from above 5% last October.

The trend is further supported by considerable inflows into bond ETFs, which have reached average monthly net inflows of $25 billion this year, significantly up from $17.1 billion in 2023. Inflows for September alone reached $22.9 billion, reflecting growing interest in the category.

The bond ETF market is largely dominated by the iShares Core U.S. Aggregate Bond ETF and the Vanguard Total Bond Market ETF, each managing approximately $120 billion in assets. Both funds track the Bloomberg U.S. Aggregate index, with different methodologies. However, many of the newer entrants, including a significant share of this year’s launches, are actively managed, allowing managers to select securities expected to outperform benchmarks.

Scott Davis, head of ETFs at Capital Group, noted that fixed income investors have traditionally preferred actively managed products, with nearly 80% of fixed income mutual funds falling into that category. Unlike mutual funds, ETFs are traded on stock exchanges throughout the day, providing instant liquidity.

Capital Group has been among the prominent asset management firms expanding into ETFs, having launched its $1.2 billion Capital Group Core Bond ETF in September 2023.

Recent launches include the Rockefeller Opportunistic Municipal Bond ETF, aimed at long-term returns through an actively managed municipal bond portfolio, and the Congress Intermediate Bond Fund, along with two series of "longevity income" ETFs from Stone Ridge Asset Management tailored for retirees, promising reliable income for those over 80.

Nonetheless, signs of rising inflation or unexpectedly strong economic growth could impact the extent of future Fed rate cuts, potentially affecting the returns of these funds.

Despite these uncertainties, issuers believe the trend in the bond sector is likely to persist. Aniket Ullal, head of ETF research and analytics at CFRA, remarked that fixed income has become a logical area for expansion, especially as the equity index fund market and active equity investments have grown more competitive.