What this 'play the recovery' strategy says about the hot bond market's future

A recent trend in the exchange-traded funds market suggests bond demand is far from cooling.

Corporate, government and high-yield bond ETFs saw inflows last month after lower bond prices and higher yields contributed to the deceleration of fund outflows in May.

Andrew McOrmond of WallachBeth Capital, an institutional execution service provider, believes the inflows can be attributed to short-term selling or cash investors want to put to work. 

“It’s been people dipping their toes into the water,” the managing director told CNBC’s “ETF Edge” on Monday. “You’re coming out of what’s going to be a U-shaped recovery, I believe. It might already be if you compare it to Covid, which was a clear V [recovery].”

It’s a strategy that should continue to pay off for investors as they “play the recovery,” according to McOrmond. However, at some point they may want to shift to equity ETFs, too.

It’s not just bond ETFs, it’s equity ETFs too

Meanwhile, equity ETFs saw somewhat flat flows despite dividend funds’ increasing popularity among investors.

Ben Slavin, global head of ETFs at BNY Mellon, recommended the Invesco S&P 500 High Dividend Low Volatility ETF as an option for investors looking to mitigate risks.

“It’s a way to play this market more defensively but also try to collect some income in a way that really avoids some of the risk, or the perceived risk, in the bond market,” Slavin said in the same interview.

Inflows last month show ETF structure dominance, Slavin added. The ETF market saw inflows as mutual funds experienced notable outflows. 

Slavin notes investors demonstrated little conviction on how to trade bonds and equities amid reported flows. However, some still uphold interest in actively-managed, fixed-income investments.

“Actively-managed fixed income is starting to attract more attention where at least certain retail investors and maybe to some degree some professionals, as well, are just saying, ‘I’ll leave it to an actively managed product or professionals,” Slavin said.

Disclosure: Ben Slavin’s firm provides asset servicing for the Invesco S&P 500 High Dividend Low Volatility ETF.

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