Things are looking up in the U.S. as the economic giant wakes up from a long sleep. The welcome signs of life are good news for the global economy but not so much for the bond market, where investors have been pulling money out in droves, spooked by the dual prospects of higher interest rates and a gradual winding down of the Fed’s bond-buying program in the U.S. According to XTF Inc., a market researcher based in New York, bond exchange-traded funds (ETFs) have experienced a stunning $6.7 billion in outflows since mid-May.
Investors are now running away from just about everything fixed income—high-yield bonds, treasuries, etc. But there is one area of the beleaguered fixed income universe where money continues to flow the right way. Target-maturity bond ETFs have attracted more than $174 million in net inflows during the same period, according to this article in the Wall Street Journal.
It’s not a huge amount of money by any stretch, but it is a bright spot in what is turning out to be a pretty rough time for bonds. Target-maturity bond funds buy and hold bonds with a common maturity date—the set date should ideally cushion investors from at least some of the volatility in the bond market. “With interest rates at historic lows, people are concerned about buying traditional bond funds that can lose their principal. They’re looking for alternatives,” Michael McClary, chief investment officer at ValMark Advisers in Akron, Ohio, told the Wall Street Journal.
Think of it as a bond ladder made up of different bonds that can help investors climb above the fray. In the U.S., there are currently 24 target-maturity ETFs covering a range of markets from investment-grade corporates to high-yield, to municipals—and there are more products set for launch in the coming weeks. Providers say they are an easier way to create bond ladders so demand will increase as investors focus more on maturity dates.
And given how bumpy the markets are going to be this summer, target-maturity products might just help investors avoid the rough ride.