Investors can’t seem to get enough bond funds

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Any way you slice it, investors are crazy for fixed-income exchange-traded funds.

An analysis from CFRA offers some perspective: from the beginning of the year through late October, $121 billion had flowed into bond ETFs, already beating the $101 billion they collected throughout all of 2018. Those inflows made up more than half of all money coming into ETFs this year, even though fixed-income funds account for only a fraction of the $4 trillion ETF universe.

Investor interest is shifting slightly: assets are piling into corporate bond ETFs – the three funds with the biggest yearly jumps in flows were tied to assets from American corporations – at the expense of government bond funds, which have seen only $36 billion of flows, compared with about $58 billion throughout all of 2018.

CFRA’s Todd Rosenbluth speculates that may have something to do with rates: at this time last year, Treasury yields were on the rise, while this year the benchmark U.S. 10-year TMUBMUSD10Y, +2.33%  has lost nearly a full percentage point and now stands at about 1.78%, even as bond yields around the world are turning increasingly negative.

There’s also some evidence that active managers of fixed income funds outperform their benchmarks, in contrast to stock-focused ETFs.

And it may also have to do with the plunge in equities last December, as previously reported:

See: Investors got spooked by the Christmas market massacre, new fund flow data show

But investors are interested in other types of debt as well: municipal bond ETFs have already attracted flows 15% higher than their full-year haul in 2018, while mortgage bond funds have seen a 45% increase.

As has become the case when passively managed ETFs attract assets, a number of analysts express concerns. In May, Moody’s Investor Service published research calling attention to the explosion in ETFs.

Read: Here’s why ETFs can’t bring down the financial system, iShares says

“ETF markets have yet to be tested by a prolonged period of market distress or high volatility, enjoying a relative calm over the past decade of nearly sixfold growth,” the Moody’s analysts wrote. “Over that same period, the market’s structure and its participants have changed drastically.”

Rosenbluth counters that passively managed ETFs hold only 4% of all outstanding U.S. debt. By far the biggest single holder is foreign investors.

CFRA research also shows that investors have shifted duration in 2019, to longer-term bond funds from shorter-term. Intermediate- and long-term bond funds’ flows have doubled this year, while ETFs such as the Vanguard Total Bond Market Index fund BND, -0.28%, which holds all maturities, gathered 58% of all flows.

Still, shorter-term bond ETFs remain popular as cash management tools. As MarketWatch reported in July, the JPMorgan Ultra-Short Income ETF JPST, -0.02%   is now the second-largest actively managed ETF available, even though it’s only been in existence for two years.

Despite their popularity, Rosenbluth thinks there’s still “room for growth” when it comes to fixed-income ETFs.