As the traditional January rally gathers steam, investors in ETFs put fresh money to work in the hottest fixed-income trades of 2017: high-yield and emerging-market credit.

Three ETFs tracking risky debt products attracted a combined $2.3 billion in the week to Jan. 5, with inflows that ranked among the four largest for U.S.-listed fixed-income ETFs.

Typically portfolio managers use ETFs to make tactical moves in their fund.
Investors poured a record $868 million into the benchmark iShares J.P Morgan USD Emerging Markets Bond ETF. Bloomberg News

The relentless buying exemplifies “asset overshoot risk,” according to Bank of America strategists led by Michael Hartnett. He compared the bet to the character in Greek mythology who ignored his father’s warning against hubris. Icarus flew too high, only to tumble out of the sky after the sun melted the wax in his wings.

Enduring appetite for risk that’s eclipsing the Federal Reserve’s tightening path shows that it will take “a lot higher” interest rates to dissuade investors from the “Icarus melt-up trade,” Hartnett and his team wrote in the recent note.

Investors poured $868 million into the benchmark iShares J.P Morgan USD Emerging Markets Bond ETF (EMB), the most on record. SPDR Bloomberg Barclays High Yield Bond ETF (JNK) garnered a $1.07 billion allocation, the largest since October 2015.

Fund flows: Who's the big winner YTD?
Passive funds are the decisive victor in attracting cash.

Meanwhile, the $445 million commitment to iShares iBoxx Dollar High Yield Corporate Bond ETF (HYG) is a contrast to withdrawals from the $18 billion Blackrock fund over the summer.

Bloomberg News