Demand for fixed income ETFs in Europe hit record highs in the first half of the year as investors looked to benefit from attractive yields.
Flows into bond ETFs hit €31bn in the six months to the end of June, according to data from Morningstar, as investors addressed the redress imbalances in their portfolios having been underweight fixed income over the past decade.
The inflows surpassed the previous record of €30.6bn in 2019, BlackRock data shows, meaning assets in bond ETFs grew by 5.9% over H1, from €328bn to €348bn.
Jose Garcia-Zarate, associate director for passive strategies at Morningstar, said: “Before the start of the tightening cycle, there was no yield of significance in fixed-income markets other than in high-yield bonds, which many investors were reluctant to go into on concerns of loading up their portfolios with excessive credit risk.
“Now there is attractive yield to be found in safer areas of the bond market and investors who have been underweighted in fixed-income for a prolonged period are now redressing the imbalance by buying government and investment-grade corporate bonds.”
He added investors have started to shift from the short-end of the yield curve to the mid-to-long area of the yield curve as they bet on interest rates peaking in the second half of the year.
The Bloomberg US Aggregate Bond index is currently yielding close to 4.7% with a duration of 6.3 years.
Gargi Chaudhuri, head of iShares investment strategy Americas at BlackRock, said: “Even if the Federal Reserve was to raise rates higher than current market expectations, the carry earned from higher coupons could be sufficient to counter losses realised by rising rates.”
Overall, flows were down in European exchange traded-products (ETPs) in the second quarter, attracting €28.1bn net new assets versus €38.9bn in Q1, driven largely by a sharp slowdown in equity inflows.
Equity ETF inflows totalled €12.7bn in Q2, 42% down on the €21.9bn recorded over the previous quarter, taking total ETP assets under management to a new market high of €1.49trn in Q2.
ESG inflows slow
ESG ETFs recorded €20.7bn inflows over the first half of the year, accounting for 28% of total flows into ETFs in Q2.
This is a decline on previous years, with ESG inflows accounting for 65% of total ETP inflows in Europe in 2022 and 53% in 2021.
“The slowdown in equity flows this year and, above all, the solid flows into government debt, where the integration of ESG principles is not as widespread as in other areas of the fixed-income market, are key explanatory factors,” Garcia-Zarate said.
Despite this, ESG ETFs still grew its market share from 19% to 19.5% over the second quarter of 2023, with assets under management totalling €289.3bn.
Elsewhere, commodity ETPs suffered €2.4bn outflows in the second quarter, offsetting the €1.3bn inflows in Q1 and turning flows negative for the first six months of the year.
Outflows were primarily driven by precious metal ETPs, however, all categories recorded outflows in Q2.
Smart beta ETPs also recorded outflows of €590m in the second quarter, offsetting the €270m inflows in Q1.