The November issue of our Bond Fund Intelligence, which was sent to subscribers Monday morning, features the lead story, "ICI Covid-19 Report Says Fixed-Income ETFs Proved Resilience," which highlights a recent look at this year's March Madness, and "BlackRock's Novick at SEC Roundtable; SEC Study," which quotes from a recent look at events surrounding the coronavirus shutdown in the spring. BFI also recaps the latest Bond Fund News and includes our Crane BFI Indexes, which show that bond fund yields and returns were flat to lower in October. We excerpt from the new issue below. (Contact us if you'd like to see our Bond Fund Intelligence and BFI XLS spreadsheet, or our Bond Fund Portfolio Holdings data.)
Our Covid-19 Report piece reads, "The Investment Company Institute published a 'Report of the Covid-19 Market Impact Working Group: Experiences of US Exchange-Traded Funds During the COVID -19 Crisis' recently, which tells us, 'Despite unprecedented market volatility in March 2020 caused by the COVID-19 crisis, the ETF ecosystem -- generally thought of as ETF issuers, APs, and ETF liquidity providers -- proved its resilience. ETF shares traded smoothly and efficiently on the stock exchanges, with dealers ... continuing to make two-sided markets in ETF shares. In addition, ETFs acted as a price discovery tool for investors. This was particularly true in the fixed-income market, where market participants faced challenges in finding liquidity and establishing pricing for individual bonds.'"
It explains, "Investment grade bond ETFs accounted for the bulk of net outflows from bond ETFs in March 2020.... This naturally raises the question of whether selling pressure on investment grade bond ETFs was greater than on investment grade bonds. Looking at the average bid-ask spread for the five largest investment grade bond ETFs, this does not appear to have been the case."
ICI's report continues, "Bid-ask spreads on high-yield bond ETFs normally are substantially narrower than those on high-yield bonds. This difference largely reflects the lower liquidity of the high-yield bond market where, even in normal times, individual bonds may lack liquidity for days. During the crisis in March 2020, while the average spreads on the five largest high-yield bond ETFs increased in dollar terms, they rose far less than those on high-yield bonds."
Our latest Roundtable article explains, "Last month, the SEC hosted a 'Roundtable on Interconnectedness and Risk in U.S. Credit Markets,' which followed the publication of its study, 'U.S. Credit Markets: Interconnectedness and the Effects of the COVID-19 Economic Shock,' a report that examined the chaos in financial markets that accompanied the mid-March sudden shutdown of the world economy. We review some of the discussion from the roundtable and quote from the study below."
During one session, BlackRock's Barbara Novick tells us, 'Starting with bond funds, the first word that comes to mind is heterogeneous. They're all talked about as if there's one big bond fund. But in fact there are many different strategies -- active, index, short duration, long duration, different credit, etc., and fund managers apply a range of liquidity risk management tools based on the type of fund.'"
She explains, "So, for example, if you have a fund with a lot of mortgage backed securities, you're going to get in a lot of cash every month from principal and interest payments. On the other hand, if you have a high yield fund that is a sector specific fund, you might deliberately hold cash or other liquid assets, or you might hold larger issues that are more liquid and basically build in what we call layers of liquidity."
Our Bond Fund News includes the brief, "Yields, Returns Inch Lower in October." It says, "Bond fund yields were flat to lower and returns were mostly lower last month. Our BFI Total Index returned -0.10% over 1-month and 3.50% over 12 months. The BFI 100 fell 0.17% in Oct. but rose 4.38% over 1 year. Our BFI Conservative Ultra-Short Index returned 0.04% over 1-mo and 1.56% over 1-yr; Ultra-Shorts averaged 0.08% in Oct. and 1.66% over 12 mos. Short-Term returned 0.09% and 3.10%, and Intm-Term fell 0.30% last month and 5.50% over 1-year. BFI's Long-Term Index fell by 0.59% in Oct. but rose 7.04% for 1-year. Our High Yield Index rose 0.26% last month and is up just 1.67% over 1-year."
In another News brief, we quote Morningstar's, piece, "What's Behind the Strong Performance of Big Funds?" They explain, "Today, the biggest bond fund is a huge success. Pimco Income (PONAX) under Dan Ivascyn produced top 2% returns in its Morningstar Category over the 10 years ended in July 2020. Yet the largest actively managed equity fund, American Funds Growth Fund of America (AGTHX), is slightly behind the median large-growth fund over the trailing three-, five-, and 10-year periods."
In a third News update, Barron's examines, "How Bonds Could Fare Under Biden, According to Two Pros." They explain, "The bond investors at Milwaukee-based Baird Advisors have an enviable record of steady performance over the years. Three funds in particular -- Baird Core Plus (BCOIX), Baird Aggregate Bond (BAGIX), and Baird Short-Term Bond (BSBIX)—are routinely praised by Morningstar. Mary Ellen Stanek, who runs Baird and serves as its CIO, has twice been nominated for ... awards."
BFI also features the sidebar, "Fink on Record ETF Flows," which tells us, "BlackRock's Laurence Fink commented during the company's latest quarterly (Q3) earnings call, 'We saw record momentum around fixed income ETFs, which continue to attract new users. iShares fixed income ETFs generated $20 billion in net inflows in the third quarter, and we have captured nearly 40% of industry flows year-to-date. As we've said before, fixed income ETFs are one of the fastest growing categories in asset management. It crossed $1 trillion in assets last summer [sic] and [is] now over $1.4 trillion, and we think it can be a multi-trillion dollar market in the years ahead.'"
Finally, a piece entitled, "Bond ETFs Poised at $1 Tril.," explains, "Bond funds continued to see strong inflows in October, but then saw a rare outflow in early November. ICI's 'Combined Estimated Long-Term Fund Flows and ETF Net Issuance,' says, 'Bond funds had estimated outflows of $3.35 billion for the week, compared to estimated inflows of $8.53 billion during the previous week [and $15.6 billion the prior week]. Taxable bond funds saw estimated outflows of $3.10 billion, and municipal bond funds had estimated outflows of $243 million.' Over the past 5 weeks, bond funds and bond ETFs have seen inflows of $66.6 billion."
