Paul Syms, head of EMEA ETF Fixed Income Product Management at Invesco, has said that data on inflow trends in hard and local currency emerging market debt ETFs and US Treasuries ETFs suggest investors are being influenced by uncertainaty caused by the ongoing trade war between the US and China, and the one now threatened between the US and Mexico.
Overall, the provider has seen EMEA-domiciled fixed income ETF inflows of $25bn in the first five months of this year, versus $16bn for the whole of 2018.
Some of this inflow is linked to the performance of equity markets, where the "wobble" seen at the end of 2018, being replaced by a reasonably strong start to 2019 left investors with the opportunity to take profits and put them into fixed income.
However, within fixed income there have been changes in allocations, Syms noted.
Inflows of some $6.5bn across hard and local currency EMD are weighted towards the first four months or so of the year, with concerns heightened recently with factors such as tweets from US president Donald Trump on the possibility of more tariffs.
Inflows are described as "strong" for euro credit, but in particular there have been inflows to US Treasuries - in Invesco's case through a suite of related ETF products launched in January.
With yields down some 100bps to around 210 bps since November, it has been "a good trade". But more than that, the expectations seen in the market in the last quarter of 2018 for rate rises by the US Federal Reserve have been replaced by expectatations of two cuts to US rates this year, and another two in 2020.
Given the relative lack of single market EMD ETFs, it is difficult to spot any distinguishable trends on the question to what degree investors are concerned about debt issued by specific countries, Syms suggests.
However, it is the case that hard currency funds tend to be a bit broader in their coverage and tend to be more liquid, because historically there has been more issuance into that space, resulting in less concentrated portfolios if investing passively.
What is suggested by the flow trends is that with some $250bn of Chinese goods already subject to tariffs and another $300bn under threat, and with some $100bn of US goods tariffed by China, and neither countries' leaders seeming to want to blink, there are heightened levels of concern among investors.
If anything, the shift of the tariff focus to Mexico is even more important because of the way the US and Mexico are integrated through supply chains in a way that China isn't. "It could have a substantial impact on the US economy," Syms says of the impact of tariffs on Mexico.
And now fixed income investors need to keep an eye on the Fed, which has moved from a tightening cycle to an expected loosening.
Here, Invesco has seen a shift in inflows to its US Treasuries range of ETFs (it launched four products in January 2019 with a focus on 1-3 years, 3-7 years, 7-10 years, and exposure across all years); from a focus on the 7-10 yr portfolio earlier in the year there has been a shift to the 1-3 yr portfolio in the past month or so, Syms notes.
"Having rallied over 100bps on 10 yr Treasuries, investors may be feeling that they are a bit at the rich end of hte scale, so may not want to take more duration on board, and may prefer to stick further down the curve," Syms explanied.
Given the still generally passive nature of fixed income ETFs, there is an onus on the design of the underlying index used, yet ETFs still have an advantage in that investors can see into the underlying track record and benchmark in a way they cannot for active funds, which will tend to be higher cost, Syms adds: "The transparency of the ETF wrapper is a safety blanket for investors."
Looking forward, he says that investors should expect the ETF industry to continued to develop the ability to provide ever more granular insight into asset classes.
In terms of themes, he says ESG is a key one. While the fixed income world may be behind on the development of ESG relative to equities, it is set for further development.