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Bond ETFs charge ahead, setting stage for 2020

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Investors fed nearly as much money into bond exchange-traded funds as those tied to stocks in 2019, signaling the growing acceptance of fixed-income ETFs across the industry.

As of Nov. 30, 2019, a total of $139.78 billion was injected into taxable and municipal bond ETFs during the year, according to data from Morningstar Direct. That pushed total assets in those products to $828.77 billion, a move aided in part by aging baby boomers reshuffling their investment portfolios ahead of retirement, lingering macroeconomic concerns and a growing appetite for risk.

"The bond market has been sliced, diced and julienned in any number of different ways by enterprising ETF providers," Ben Johnson, director of global ETF research at Morningstar, said in an interview. "Now, you're seeing a greater segment of their respective client bases using them in a wider variety of ways than ever before."

Fixed income accounts for a small fraction of the more-than-$4 trillion ETF market. However, the pool of money invested into the product base is considerably larger today than what it was a year ago when taxable and municipal bond ETFs' assets totaled $652.12 billion, according to Morningstar Direct. Net inflows into bond ETFs in 2018 totaled only $97.18 billion.

After a tumultuous fourth quarter in 2018 for stocks, investors entered 2019 hesitant about the state of markets around the world. Trade tensions between the U.S. and China were unresolved, the 2020 U.S. presidential election was ramping up and European economic growth was slowing.

But while equity markets surged in 2019, especially in the U.S., those concerns created an environment where investors were looking to hedge their equity exposures through fixed-income vehicles such as bond ETFs, a trend that does not show many signs of stopping in the new year, said Todd Rosenbluth, director of mutual fund and ETF research at CFRA.

"Lower-risk equities and fixed income have been the key story in the flows world this year," Rosenbluth said in an interview. "If you're using bond ETFs to support the core of your portfolio, you're likely to continue to do so [in 2020]."

At the front of the pack of bond ETFs that saw sizable inflows over the year were several products from Vanguard Group Inc. and BlackRock Inc.

Through Dec. 26, 2019, Vanguard's Total International Bond ETF recorded $10.83 billion of net inflows in 2019, making it one of the most popular ETFs of the year, according to industry data and news provider ETF.com. The Pennsylvania-based money manager's Total Bond Market ETF trailed closely behind with $9.61 billion in inflows. BlackRock's iShares Core U.S. Aggregate Bond ETF generated $8.62 billion of inflows. Its iShares U.S. Treasury Bond ETF had $8.19 billion in inflows during the same period.

The rush into fixed-income ETFs has, as a result, become a key tailwind for asset managers.

BlackRock's iShares unit saw $87.38 billion of net inflows into fixed-income ETFs during the first nine months of 2019, representing more than 80% of the business' total net inflows. Through the end of November, Vanguard saw $33 billion of inflows into its U.S. bond ETFs, a spokesperson said in an email. By comparison, the company had $18.2 billion of U.S. bond ETF inflows in all of 2018. State Street Global Advisors Inc.'s ETF business SPDR saw $8.60 billion of net inflows into its fixed-income ETF product suite through the end of September, which was about 7.6% of the U.S. fixed-income ETF market's inflows during the same period, according to Bloomberg data.

"This is just the beginning," BlackRock Chairman and CEO Larry Fink said in a July earnings call. "It took 17 years for fixed-income ETFs to reach $1 trillion in [assets under management] and they still represent less than 1% of the $105 trillion global bond market. We believe they are well positioned to double to $2 trillion globally within five years."