3 Bond ETFs Seeing Strong Inflows [iShares Trust, Vanguard Short-Term Bond ETF, PowerShares Exchange-Traded Fund Trust II]

January 29, 2014 6:18pm NYSE:BKLN NYSE:BSV

market bonds2013 can easily be labeled as a year which brought out clear winners and losers in the investment world. While equities clearly won the show, bonds and commodities were struggling in the red.


As concerns over Fed scaling down the asset purchase program loomed large after May last year, yields moved northwards, while bond prices struggled southwards.

Among the concerns about rising rates, longer terms bonds were the worst hit last year, while high yield bonds managed to deliver decent returns.

PowerShares Senior Loan ETF (NYSEARCA:BKLN), Vanguard Short-Term Bond ETF (NYSEARCA:BSV) and iShares Floating Rate Note ETF (NYSEARCA:FLOT) were the three most popular ETFs to attract investor interest in terms of asset under management.

While BKLN has continued with its bull run, we have highlighted two other ETFs besides BKLN, which are seeing heavy inflows this year.

As the Fed unfolds its taper program, these funds could be interesting picks for this year Investors should thus keep a sharp eye on the funds mentioned below.

PowerShares Senior Loan ETF 

Like 2013, this fund has turned out to be the most popular bond ETF in 2014 in terms of asset under management (AUM). BKLN has attracted a whopping $266.36 million since the start of the year. This makes BKLN’s total AUM worth $6.7 billion.

This fund tracks the returns of the S&P/LSTA U.S. Leveraged Loan 100 Index, delivering returns of the senior loan market. (Read: Senior Loan ETFs: The Best Bet for Rising Rates?).

Senior loans, also known as leveraged loans, are private debt instruments issued by a bank and syndicated by a group of banks or institutional investors. These instruments usually have below-investment grade credit ratings and as such pay a high yield.

These floating rate instruments have become quite popular among investors as they greatly reduce risks. This makes these securities an ideal choice in a rising rate environment, while still paying out a solid level of income to investors.

The product holds 126 bonds having maturities of less than 10 years. With the average days to reset being just over 21, interest rate risk is negligible. The fund focuses on non-investment corporate bonds that have credit ratings of BBB or lower.

The fund has an attractive dividend yield of 4.30% and is up 0.57% so far this year. BKLN charges investors 66 basis points as fees.

PIMCO 0-5 Year High Yield Corporate Bond Index Fund (HYS)

Although tapering has started from this month, the Fed has promised to keep interest rates low till the unemployment rate drops below 6.5%.  Thus, a rock-bottom interest rate environment prevailing in the U.S. currently is encouraging investors to go for a high-yield option.

Moreover, even if rates rise in the near future, short duration bonds protect investors from rising rates.(read: HYLD: The Best Choice Among High Yield Bond ETFs?)

As such HYS has attracted the second best fund inflow within the fixed income space. The fund saw its assets rise by $170.4 million since the start of the year, which takes its total AUM to $3.8 million.

The ETF follows the the BofA Merrill Lynch 0-5 Year US High Yield Constrained Index holding 353 stocks in its basket. It targets the short end of the yield curve with average maturity of 2.81 years and average duration of 1.91 years, suggesting lower interest rate and default risks.

The fund sports a dividend yield of 4.33% and charges investors 55 basis points as fees. HYS returned 6.63% last year and is up 0.31% so far this year.

iShares 7-10 Year Treasury Bond ETF (IEF)

This fund tracks the Barclays U.S. 7-10 Year Treasury Bond Index and has gathered around $160.32 million worth of assets since the beginning of the year. Thus, the fund manages a total asset base of $3.8 billion and is one of the most popular funds within the government bond space.

The fund provides exposure to U.S. Treasury bonds having maturities between 7 and 10 years and holds 15 securities in its basket. The product holds only investment grade bonds paying a fixed rate of yield.

IEF targets the intermediate end of the yield curve with a weighted average maturity of 8.41 years. The fund has an effective duration of 7.51 years and as such is comparatively more sensitive to interest rate changes than short term bonds

The fund returned a negative 6.12% last year. However, with disappointing jobs data and low inflation, leading to speculation that the taper may not be at the pace earlier expected, , this fund has gained some stability. Ithas added 2.03% in the year-to-date time frame.

Also, with 15 basis points as fees, the fund is one of the cheapest options in its space.

This article is brought to you courtesy of Eric Dutram.


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