January saw a significant jump in capital flowing into fixed-income exchange-traded products, according to the latest “ETP Landscape” report published by the BlackRock Investment Institute.

These products set a new global monthly record of $9.0 billion of inflows in January 2012, soundly besting the previous record of $6.7 billion of inflows set in January 2009.

“We see a quiet revolution building in the asset class as more and more investors learn how to use fixed income ETFs to build portfolios that combine low risk with the potential for yield,” said Peter Fisher, senior managing director and head of BlackRock’s Fixed Income Portfolio Management, in a statement.

The fixed-income movement is only one part of a larger flow of funds into ETPs of all types. The global exchanged-traded product industry had its best month of January ever with $34.1 billion of net inflows, representing a 144% increase in inflows over the previous record set in January 2011 and up 116% from December 2011.

In fact, the increase from December was so big that it bucked the dampening cycle in fund movement which traditionally follows year-end rebalancing, BlackRock indicated.

Nonetheless, demand is expected to stay strong in these products at least through this year.

“Just like equity-based ETFs, fixed-income products are becoming very popular,” says Mel Herman, president and chief executive of XTF Inc., an ETP research firm. “As demand for fixed income products increase, ETFs will continue to gather assets at the expense of mutual funds.”

For months, the march out of equity mutual funds has been relentless, according to data from the Investment Company Institute. For each month since June, cash flow out of equity mutual funds has averaged more than $23 billion. The flow out in December was $28.791 billion.

Part of the demand for these products, of course, comes from investor appetite for the low volatility of all fixed-income assets in the wake of the crisis of 2008.

Indeed, demand in ETPs seems to mirror that displayed for other fixed-income assets. For example, investment grade and corporate bond ETPs garnered the lion share of the new inflows in January: garnering $3 billion and $4 billion, respectively.

This translates into 77% of all new assets. In comparison, the zeal for the other debt categories was more tepid, with $0.6 billion of flow for each of the following three categories: inflation-indexed, broad/aggregate, and government and inflation-protected bonds.

“In this challenging environment with sustained levels of low yield, now more than ever investors are looking for new ways to generate income,” Fisher of BlackRock said in a statement.

However, after a five-year learning curve, investors are finally appreciating the peculiar benefits of funds which are exchange-traded. Since these funds can be bought and sold on exchanges much like any equity or other commodity, ETPs usually are more liquid, easier to price, and more transparent than actively-traded mutual funds.

Since, most are passively traded, they have cheaper operational costs. Moreover, more investors, according to MorningStar analyst Timothy Strauts, are turning to fixed-income ETPs because many of these funds have a sharper investment focus than mutuals.

“You can target your exposure to particular areas in the market,” said Mr. Strauts. “If you want to do one-to-three year treasuries, you got it. If you want to do long-term corporate bonds, you can do that. The same with emerging market bonds.”

Don’t expect ETP provocateurs to overturn the tsars of mutual funds any time soon though. The BlackRock report says that the sector, equity, fixed-income and commodity combined, has just over $1.6 trillion in assets under management. The fixed-income sector is only $271 billion in size, for instance.

Tommy Fernandez writes for Money Management Executive



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