There has been a fair amount of discussion and debate in the
recent past about the possibility of a great rotation from bonds
to stocks as a catalyst that drove equity prices higher. And now
that we are trending or breaking all time highs in stocks,
things are a bit clearer (read
3 ETFs Beating the S&P 500
Given the recent developments in the domestic U.S. economy, it
can be strongly argued that one of the major drivers behind the
surging equity levels was clarity. Transparency on some of the
major uncertainties surrounding the economy, which if unresolved,
could have resulted in the exact opposite stock market scenario
that we find ourselves in right now.
However, amidst all optimism in the first quarter of fiscal
2013, there has been a rather unusual development on the ETF
space. Short term Bond
have been witnessing huge inflows in their asset base for the
quarter-however hard that might be to imagine (see
Top Performing ETFs of the First Quarter
The following table summarizes the biggest inflows in short
term bond ETFs for the first quarter:
Funds Flow for Short Term Bond ETFs (1Q13)
Inflow/ (Outflow) (in millions)
Interestingly, out of the top 10 asset accumulators in the
fixed income ETF space, 7 are short term bond ETFs. Also with a
combined inflow of close to $9 billion for the top 10 asset
accumulators, the short term bond ETFs account for close to $6.2
billion which is nearly 70%.
It is true this kind of behavior from investors was highly
unlikely, given the excitement and optimism in the equity
markets. Still, it should not be forgotten that the surging
equity levels was viewed upon by a great deal of skepticism by
many market participants on grounds of lack of fundamental
Banking ETFs: Laggards or Leaders?
Also, the continuation of the Federal Reserve bond purchase
program was put to question, which if halted would have resulted
in falling bond prices. This was particularly true for bonds
which target the longer end of the yield curve as they have the
highest interest rate sensitivity.
Furthermore, the investment case for gold in the recent past
has been lackluster to say the least. Also, going forward it is
expected that the yellow metal will exhibit a near term weakness
considering the attractiveness of equities. Also its movement in
the near term would be better guided by the direction of the U.S.
dollar. The U.S. dollar continues to gain in strength thanks to
the devaluation of other developed market currencies (read
British Pound ETF: Time to Buy?
Therefore, the skepticism surrounding equities of 'some'
players, the un-realistic risk-return tradeoff of long term
bonds, and the sheer unattractiveness of gold have made short
term bond ETFs exciting plays as
"new safe havens'.
This has transferred over into a surge in popularity, as
evidenced by their impressive AUM accumulation totals in Q1.
Judging by these facts it can be said that the recent surge in
popularity of the short term bonds is a direct result of an
anticipation of a correction in equities. Still, it is very
important to consider that this space is nothing more than a cash
alternative investment offering almost zero yields and negligible
possibility of capital appreciation.
However, if the case for short term bond ETFs as safe haven
plays does prove to be correct, this space can witness even more
asset accumulation going forward. This could be especially true
if anxiety over lofty equity levels continues, or if a broader
market pullback materializes, thereby increasing demand for these
lower risk ETFs (see
Corn ETF Continues Plunge
Either way, considering the case for other safe investment
avenues, short term bond ETFs definitely seem to be the
safer safe havens,
at least for the time being, and thus could continue to see
inflows in Q2 as well.
Want the latest recommendations from Zacks Investment
Research? Today, you can download
7 Best Stocks for the Next 30 Days
Click to get this free report >>
VANGD-SHT TRM B (BSV): ETF Research Reports
ISHARS-BR 1-3CB (CSJ): ETF Research Reports
PIMCO-0-5 HY CB (HYS): ETF Research Reports
PIMCO-E SMETF (MINT): ETF Research Reports
ISHARS-BR SH TB (SHV): ETF Research Reports
FLEXS-IB 3Y TAR (TDTT): ETF Research Reports
VANGD-ST CRP BD (VCSH): ETF Research Reports
To read this article on Zacks.com click here.
Want the latest recommendations from Zacks
Investment Research? Today, you can download 7 Best Stocks for
the Next 30 Days. Click to get this free report