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ETF Wrap: ‘We were twice the next competitor’: BlackRock’s iShares dominates fixed-income ETFs flows in 2022

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Happy New Year! For this week’s ETF Wrap, I spoke with Salim Ramji, BlackRock’s global head of iShares and index investments, and caught up with Todd Rosenbluth, head of research at VettaFi.

Please send feedback and tips to christine.idzelis@marketwatch.com. You can also follow me on Twitter at @cidzelis and find me on LinkedIn.

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BlackRock’s iShares dominated flows into exchange-traded funds focused on fixed income in 2022, an ugly year for markets in which ETFs kept attracting investors.

“We had record flows even in one of the worst fixed-income markets,” said Salim Ramji, BlackRock’s global head of iShares and index investments, in a phone interview. “We were twice the next competitor.”

Among U.S.-listed ETFs that invest in fixed income, iShares attracted by far the most assets in 2022 at around $100 billion, according to estimated net flow data from Morningstar Direct. The data show Vanguard with the second biggest fixed-income ETF inflows last year at about $49 billion, followed by State Street with around $21 billion.

“It was 20 years ago that we did the first U.S.-listed ETF within iShares,” inventing the category, said Ramji. Today, BlackRock’s iShares offers around 400 fixed-income ETFs globally, he said. 

“You can slice fixed income markets in multiple ways that just weren’t possible even 5 years ago, or 10 years ago,” in the ETF market, said Ramji. BlackRock provides ETFs that invest across government and corporate debt with different credit qualities, maturities and geographies. 

Ramji sees plenty of room for industry growth. The fixed-income ETF category, including BlackRock’s competitors, represents just a 2% share of the $100 trillion fixed-income market, he said.

In his view, the marketplace for bond ETFs is going to be $5 trillion before the decade has ended. For iShares, “the innovation machine is always on,” he said. “But we need to be disciplined.”

Read: BlackRock’s new fixed-income ETFs use an options strategy — here’s how they could pay off as investors focus on Fed rate hikes, says its U.S. head of bond ETFs

Most popular fixed-income ETFs

The most popular exchange-traded funds targeting fixed income in 2022, based on assets flows, were the iShares 20+ Year Treasury Bond ETF
TLT,
+0.42%
,
the Vanguard Total Bond Market ETF
BND,
-0.11%

and the SPDR Bloomberg 1-3 Month T-Bill ETF
BIL,
+0.03%
,
according to Todd Rosenbluth, head of research at VettaFi. 

The iShares 20+ Year Treasury Bond ETF gathered around $15 billion last year, while the Vanguard Total Bond Market ETF attracted about $14 billion and the SPDR Bloomberg 1-3 Month T-Bill ETF had around $13 billion of inflows, Rosenbluth said by phone, citing VettaFi data. 

With TLT and BIL, “you get the safety of investing in government bonds, but with two different risk profiles,” he said. TLT, the ticker for the iShares 20+ Year Treasury Bond ETF, is a “go-to product when investors are concerned about recession,” he said. But it’s also “very interest rate sensitive” compared with BIL, the ticker for SPDR Bloomberg 1-3 Month T-Bill ETF, as it has exposure to longer-dated debt maturities, he added.

Rising interest rates in 2022 pummeled both stocks and bonds as the Federal Reserve hiked its benchmark rate to fight high inflation, a battle that is unfinished in 2023. Although the U.S. labor market remains strong, many investors have been fearing that the Fed’s hawkish monetary policy may lead to a recession this year. 

Read: Why the consumer is ‘critical’ for investors to watch in 2023 as bear market ‘not yet complete’

“Historically, long-term Treasurys have been the safest of havens,” and after the rise in yields, “you’re now getting income,” he said, which means investors are being paid to “wait out” a potential recession, said Rosenbluth. 

But the iShares 20+ Year Treasury Bond ETF suffered a huge loss last year of 31.2% on a total return basis as interest rates rose amid soaring inflation, while the SPDR Bloomberg 1-3 Month T-Bill ETF eked out a gain of 1.4%, according to FactSet data.

The SPDR Bloomberg 1-3 Month T-Bill ETF is “essentially cash,” said Rosenbluth. “It’s where you would hide out if you were fearful that the Fed was raising interest rates.” 

Investors have been trying to determine when and where the Fed’s benchmark rate, currently in the targeted range of 4.25% to 4.5%, may peak. Minutes of the Fed’s policy meeting in December, released on Wednesday, showed that no Fed official expected a rate cut would be appropriate in 2023. 

Meanwhile, the popular Vanguard Total Bond Market ETF has surpassed the iShares Core U.S. Aggregate Bond ETF as the biggest bond ETF based on assets under management, although it’s close, according to Rosenbluth. BND has around $85 billion of assets, compared with around $83 billion for AGG, FactSet data show.

‘Different fixed-income regime’

The rise in interest rates in 2022 has brought yield back to the fixed-income market, attracting investors. 

The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.712%

jumped 2.330 percentage points in 2022 to 3.826%, its largest annual gain on record based on data going back to 1977, according to Dow Jones Market Data. 

Meanwhile, two-year Treasury yields
TMUBMUSD02Y,
4.461%

soared 3.669 percentage points last year to 4.399% and the 30-year yield
TMUBMUSD30Y,
3.786%

climbed 2.046 percentage points to end 2022 at 3.934%, marking the largest annual increases ever for each based on data as far back as 1973, according to Dow Jones Market Data. 

“We’re entering into a different fixed-income regime,” said BlackRock’s Ramji. “And that provides multiple opportunities for fixed-income investors.”

See: ‘They can actually derisk their portfolios’: Here’s where BlackRock is seeing iShares bond ETFs garner inflows amid climbing bond yields

Record government debt ETF flows

In 2022, U.S.-listed exchange-traded funds broadly saw their second-best year ever despite a brutal year for stock and bonds, raking in more than $615 billion, according to a report from Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors. 

Read: Bear market in 2022 speeds up ‘great migration out of mutual funds into ETFs’

“Bond ETFs, led by a new yearly record of $125 billion of inflows into government funds, just narrowly missed taking in $200 billion for the third straight year,” said Bartolini, in the report.

Ultra-short duration government bonds pulled in $73 billion, or “80% more than the prior record set in 2018, another time period that saw rates rise and global markets fall,” he wrote.

So far this year, the iShares 0-3 Month Treasury Bond ETF
SGOV,
+0.04%

has garnered around $1 billion of inflows, while the SPDR Bloomberg 1-3 Month T-Bill ETF has attracted more than a half billion dollars, according to FactSet data.

‘Dam broke’

“I’m not surprised that we saw demand for fixed-income ETFs” last year, as the beaten up bond market spurred investors to rotate out of mutual funds into ETFs as they took advantage of the opportunity to “tax loss harvest,” said Rosenbluth. 

“Historically investors rotated from equity mutual funds to equity ETFs, but stayed loyal to their bond mutual funds,” he said. “The dam broke within the fixed income world and investors went looking for alternatives.”

As usual, here’s your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good…

Top Performers

%Performance

KraneShares CSI China Internet ETF
KWEB,
+0.46%

15.7

EMQQ The Emerging Markets Internet & Ecommerce ETF
EMQQ,

11.0

Invesco China Technology ETF
CQQQ,
+0.36%

10.8

iShares China Large-Cap ETF
FXI,
-0.22%

10.8

iShares MSCI China ETF
MCHI,
-0.08%

10.3

Source: FactSet data through Wednesday, Jan. 4, excluding ETNs and leveraged products. Includes NYSE, Nasdaq and Cboe traded ETFs of $500 million or greater

…and the bad

Bottom Performers

%Performance

KraneShares Global Carbon Strategy ETF
KRBN,
+0.84%

 

-7.6

iShares MSCI Brazil ETF
EWZ,
+3.42%

-7.3

United States Oil Fund LP
USO,
+0.75%

-6.2

iShares S&P GSCI Commodity Indexed Trust
GSG,
-0.30%

-5.3

iShares Latin America 40 ETF
ILF,
+2.75%

-4.2

Source: FactSet

New ETF

The Gabelli Commercial Aerospace & Defense ETF
GCAD,
-0.12%

began trading this week on the New York Stock Exchange. The new fund seeks to invest in manufacturers, assemblers and distributors of aircraft and aircraft parts, as well as producers of components and equipment for the defense industry such as radar equipment and weapons, according to a Gabelli Funds announcement on Dec. 28.

Weekly ETF reads

JPMorgan’s Smash-Hit ‘Income’ ETF Seen Battling Off Bond Market (Bloomberg)

As Bets on High Yield ETFs Surge, Risk in Portfolios May Jump (ETF.com)

ETF Market Expanded in 2022 Through Bear Market But Took Hits (Bloomberg)

Robust inflows obscure a difficult year for ESG funds (Financial Times)

Best Performing Dividend ETFs of 2022 (TheStreet)

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