The November issue of our Bond Fund Intelligence newsletter was sent to subscribers Tuesday morning. It features the lead story, "Bond Funds & EFTs Break $4.5 Trillion; $350B inflows YTD," which reviews bond flows and EFT asset growth in the last month and quarter, and the fund "profile" piece, "Vanguard's Chris Wrazen: Short-Term Bond Index," which discusses how bond index funds are different than stock index funds. BFI also recaps the latest Bond Fund News, including the briefs: Yields & Returns Dip in October. BFI also includes our Crane BFI Indexes, averages and summaries of major bond fund categories. We excerpt from the November issue below. (Contact us if you'd like to see a copy of our latest Bond Fund Intelligence, which is $500 a year, and BFI XLS data spreadsheet, which is $1,000. Watch for our next Bond Fund Portfolio Holdings data too early next week.)

Our lead "Bond Funds & EFTs Break $4.5 Trillion; $350B Inflows YTD" story says, "Bond fund inflows and asset growth accelerated in the latest month and quarter, continuing to run at a near-record pace. Based on the Investment Company Institute's numbers, bond funds (and bond ETFs) have increased by $451 billion YTD (through 9/30) and they've seen an additional $49.3 billion in inflows through 11/1. Bond ETFs continue to grow more rapidly- up 25.3% in 2017 vs. 9.4% for traditional bond funds."

It continues, "Discussing the sizeable ETF inflows, The Financial Times writes, 'Record Flows for Exchange-Traded Funds That Track Bond Fund Markets.' They tell us, 'Exchange-traded funds (ETFs) that track fixed-income benchmarks have attracted nearly $130 billion so far this year, surpassing the record-breaking 2016, when almost $117 billion poured into bond ETFs, according to Morningstar data. Interest is spreading beyond the most popular bond ETFs to other, more niche, debt products.'"

Our lead article continues, "ICI's monthly "Trends in Mutual Fund Investing" shows bond fund assets rising by $18.9 billion to $3.993 trillion in September. Over the past year, bond fund assets have risen by $254.2 billion, or 14.7%. Year-to-date, bond fund assets have risen by $343 billion (through 9/30)."

It quotes ICI's release, "Bond funds had an inflow of $25.16 billion in September, compared with an inflow of $20.34 billion in August. Taxable bond funds had an inflow of $22.46 billion in September, versus an inflow of $16.50 billion in August. Municipal bond funds had an inflow of $2.70 billion in September, compared with an inflow of $3.84 billion in August."

Our "profile" interview says, "This month, BFI speaks with Vanguard Portfolio Manager Chris Wrazen, who runs Vanguard's Short-Term Bond Index Fund. He discusses a number of issues in the short-term bond and index fund marketplace, including supply, yields, flows, and other challenges in tracking bond indexes. Our Q&A follows."

BFI asks, "How long have you been running short-term bond and index funds?" Wrazen tells us, "We launched Total Bond Index fund back in 1987, so we have about 30 years or so of experience with bond index funds. With respect to the front end, we launched Short Index in 1994, so we have about 23 years with the 'maturity tranched' suite of funds out there.... I have been at Vanguard since 2004 and in fixed income since 2008.... The first five years or so, I was on the active side, focused on structured products. Then for the last five years, I have been on the index side."

BFI also says, "Tell us about index funds in general." Wrazen responds, "On the fixed income side, it's a little bit different than equities because you can't just go and buy a basket of securities to replicate the benchmark. The fixed income market is still primarily traded OTC, so a lot of it is still voice, over the phone. We do leverage some electronic trading platforms, but even so, the liquidity in the space is such that you couldn’t just go out and buy the whole benchmark."

Wrazen continues, "So anytime we have a subscription, we need to decide which securities we want to buy. Even though it's an index product, at the security level we are going to be putting on overweights and underweights. Granted they will be very small. But we do want to be very deliberate about those securities that we have small overweights and small underweights in."

Our Bond Fund News includes a brief entitled, "Yields Move Sharply Higher in Oct. Yields jumped and returns were higher across most of the Crane BFI Indexes last month. The BFI Total Index averaged a 1-month return of 0.12% and a gain of 2.45% over 12 months. The BFI 100 returned 0.14% in October and 2.81% over 1 year. The BFI Conservative Ultra-Short Index returned 0.12% over 1 month and 1.42% over 1-year; the BFI Ultra-Short Index averaged 0.11% in October and 1.49% over 12 mos. Our BFI Short-Term Index returned 0.07% and 1.61% for the month and past year. The BFI High Yield Index increased 0.36% in Oct. and 6.97% over 1 year."

The new issue also includes a News brief entitled, "Morningstar Writes '4 Bond-Fund Basics Worth Knowing.'" These include: "Your Benchmark is Worthless; Your Manager Knows It;" "Risk Is Back;" and, "Fees Are Important - No, Seriously." They explain, "After the financial crisis, it became conventional wisdom that runaway rising interest rates would be right around the corner but notwithstanding a few nasty spikes, rates have mostly ground lower and lower.... Every dollar you pay in fees is a dollar you don't get in returns, and at today's yields the same expense ratio eats up more of your income than it used to.... [T]he only way to consistently beat high fees is to take on more risk."

Finally, the November issue of BFI includes the sidebar, "MStar on Muni Indexing." It says, "Morningstar's "Fund Spy" recently wrote "Indexing Comes to Muni-Ville." They tell us, "In August 2017, Vanguard Tax-Exempt Bond Index (VTEAX) turned two years old. The fund remains the market's only municipal open-end bond index mutual fund. Although still in its youth, the fund's assets had grown to $1.8 billion as of Sept. 30, 2017. As one of the cheapest funds in the muni national intermediate Morningstar Category at a mere 9 basis points, this fund has fared well relative to peers."

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