February 26, 2021

Inflation Concerns Boost Flows into Inflation Protected and Loan Participation Funds and ETFs

by Tom Roseen.

With the improving distribution of COVID-19 vaccinations, a decline in new cases, and a push by Democratic leadership to pass the proposed $1.92 trillion aid package, it’s not surprising to see some concern regarding inflationary pressures as all of these are expected to bolster economic recovery in the second half of the year. Demand is on the rise and some of the out-of-favor cyclical stocks and inflation focused issues have been gaining momentum—after all the market is forward looking.

During the Refintiv Lipper fund-flows week, we saw near-month crude oil futures jump to a 13-month high, closing at $63.22 per barrel on Wednesday, February 24, as investors anticipated renewed opportunities as the economy begins to reopen. Oil prices were also pushed higher by the recent harsh winter storm that impacted much of the U.S. The 10-year Treasury yield settled at 1.38% on the day (a rise of nine basis points in just one week).

While taxable fixed income ETFs witnessed their second consecutive week of net outflows for the fund-flows week ended February 24, 2021, handing back some $2.2 billion for the most recent week, authorized participants (APs, those investors who actually create and redeem ETF shares) were net purchasers of Loan Participation ETFs (+$152 million, their sixteenth consecutive week of net inflows) and Inflation Protected Bond ETFs (+755 million, their twentieth consecutive week on net inflows).

In contrast, while conventional taxable fixed income funds witnessed their tenth consecutive week of net inflows—attracting $6.2 billion this week—inflation protected and floating-rate funds also witnessed continued attention. Loan Participation Funds (+$534 million) attracted net new money for the seventh week running (their longest net inflow streak since Q3 2018) and Inflation Protected Bond Funds (+$499 million) took in net new money for the nineteenth week in a row.

Assuming no big market changing events occur over the next two trading days before the end of February, net flows into Inflation Protected Bond Funds (including ETFs) for both January (+$5.9 billion) and February (+$3.6 billion) are record amounts going back 2002, when this classification was created. And flows into Loan Participation Funds and ETFs for the first two months of 2021 (+$3.9 billion and +$3.1 billion, respectively) are the strongest since 2017.

Year to date, the average taxable bond fund has shed 0.95% of its year-end value, with General U.S. Treasury Funds (-7.38%) suffering the largest declines and Loan Participation Funds (+1.56%) witnessing the largest plus-side returns. Inflation Protected Bond Funds didn’t fair as well as its Loan Participation Funds counterpart, suffering a 1.56% decline so far this year.

On the Inflation Protected Securities Funds (and ETFs) side, the top three attractors for investors assets year to date were Schwab US TIPS ETF (SCHP, +$1.7 billion), iShares TIPS Bond ETF (TIP, +$1.1 billion), and iShares 0-5 Year TIPS Bond ETF (STIP, +$713 million).  The top draws for Loan Participation Funds (and ETFs) were SPDR Blackstone Senior Loan ETF (SRLN, +$1.3 billion), Invesco Senior Loan ETF (BKLN, +$1.2 billion), and BlackRock Floating Rate Income Portfolio, Institutional Shares (BFRIX, +$704 million [including all share classes]).

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