Investors switch from active to ETFs in government bonds

Added 9th November 2015

ETFs have been very quickly establishing themselves as the preferred investment vehicle for government bond investors over the past few months, an analysis of Morningstar fund flows data shows.

Investors switch from active to ETFs in government bonds

From April to the end of September, European investors have poured a net €3.3bn into government bond ETFs, while at the same time pulling out a record €4.3bn from actively managed government bond funds.  

With the eurozone government bond yields at record lows, investors see very few alpha opportunities left in the asset class, “We prefer passive solutions for asset classes such as government bonds,” says Tanja Wennonen-Kärnä, a senior portfolio manager at Evli, a Finnish private bank. “Government bond yields keep moving up and down all the time, so it’s difficult to form a constructive view about this asset class,” she adds.

It’s all about the costs

The main factor explaining the diminished popularity of actively managed bond funds are the costs associated with them. With the majority of eurozone government bonds with a maturity of less than five years now trading at negative yields, every basis point of additional costs can be critical. “Active bond investments generate no alpha at the moment, with a few exceptions,” says Tristan Delaunay, CEO of Paris-based investment boutique Athymis Gestion. So why bother investing in active funds in the first place?

Unsurprisingly, Delaunay has ditched his allocation to active government bond funds altogether. “We have been underweight govvies for a long time, but when we look for safe havens we sometimes buy long-duration bonds, but exclusively in ETF form,” he says.

The use of ETFs in this space has two advantages, believes Delaunay. “You can get in and out quickly during periods of stress, and you don’t have to deal with complicated bets by the manager which can distort the defensive nature of the asset class,” he says.

“Government bond yields keep moving up and down all the time, so it’s difficult to form a constructive view about this asset class" - Tanja Wennonen-Kärnä

However, ETFs also have their downsides. Apart from possible liquidity constraints, though these are less likely to occur in relatively large government bond markets, trading costs could become problematic, and drive total yields down significantly. “A typical bid/ask spread is about 20 basis points, and you still have to add your broker costs to that,” says Delaunay. So when you are a tactical allocator changing positions frequently, even ETFs might be too costly in the long run. So you might then better decide to stay out of government bonds altogether...  

It’s different for credit

In investment grade corporate bonds, where yields tend to be a bit higher than for government bonds, active funds have also been sold off over the past months, even at a much higher pace. But the €11.1bn of net outflows have hardly been replaced by passive inflows, which amounted to only a little more than €1bn over the period. But these outflows from active funds might just be a temporary setback, since investors had been adding frantically to their corporate bond holdings at the start of the year.

Click here to see a full overview of recent fund flows for all asset classes.

Inside the The Fund Selector Asset Class Report Issue

The Fund Selector Asset Class Report

This is a bi-yearly report looking at the state of the professional investor industry in continental Europe. It looks at the forward looking investment intentions of hundreds of fund selectors, asset allocators and portfolio construction specialists across 13 asset classes and 14 countries. It compares those views with the outlooks of 20 of the leading fund managers in the world; and to put it all in context it analyses historic fund flows into those same strategies. 

An essential guide for anyone buying – or selling – mutual funds.

Visitor's Comments Add your comment

Add Your Comment

We won't publish your address

Features

Hunting for yield in alternative credit

Hunting for yield in alternative credit

Record-low bond yields have sent both institutional and retail investors in search of alternative credit options for their portfolios. They have tried absolute return funds,...

Interviews

Ricardo Libano & the active/passive dilemma

Ricardo Libano & the active/passive dilemma

Ricardo Libano, a fund selector at the Portuguese wealth manager IM Gestão de Ativos in Lisbon, has a natural inclination to invest in active funds. But it’s not always easy...

About Author

Tjibbe Hoekstra

Senior Reporter

Tjibbe joined Expert Investor as a senior reporter in March 2014. Before moving to London he worked as a financial news reporter for various news outlets in Amsterdam, including Reuters and ANP, the main news agency in the Netherlands. He also worked for Fondsnieuws, a website and magazine for finance professionals in the Netherlands. Tjibbe holds a MSc in Public Administration and a post-graduate diploma in Journalism.

Top Stories

ANALYSIS: Brexit one year on

ANALYSIS: Brexit one year on

It has now been exactly a year since the UK electorate made, as a British fund manager put it recently, “a huge strategic error of the like the country hasn’t experienced in maybe a century”...

Emerging market bond inflows – just starting or topping off?
Emerging market bond inflows – just starting or topping off?

Has the run into emerging market bonds only just started, or have flows already reached saturation...

Wells Fargo AM launches European IG credit fund amid challenging outlook
Wells Fargo AM launches European IG credit fund amid challenging outlook

Wells Fargo Asset Management isn’t afraid of a challenge. It has launched a European investment...

News

What next after China A-share MSCI inclusion?

What next after China A-share MSCI inclusion?

Wealth and asset managers give their views on the implications of the MSCI inclusion...

Published : 22, Jun 2017

Saudi Arabia closes in on emerging market status as royals reshuffle

Saudi Arabia closes in on emerging market status as royals reshuffle

Saudi Arabia has taken a big step towards being classified as an emerging market...

Published : 22, Jun 2017

China A-share inclusion a small first step

China A-share inclusion a small first step

Largely within expectations, the MSCI will add Chinese A-shares to its emerging markets...

Published : 21, Jun 2017

Investors remain hungry for value stocks

Investors remain hungry for value stocks

European value stocks have been in high demand with investors, who are banking on...

Published : 20, Jun 2017

ANALYSIS: What to watch out for as Brexit negotiations begin

ANALYSIS: What to watch out for as Brexit negotiations begin

“Positive and constructive” was how the UK’s Brexit secretary David Davis described...

Published : 19, Jun 2017

Events

Expert Investor Congress Spain 2017
Expert Investor Congress Spain 2017

Monday 25 & Tuesday 26 September
Melia Hotel, Valencia

Expert Investor Italy 2017
Expert Investor Italy 2017

Tuesday 3rd October 

Hotel Principe di Savoia, Milan

Expert Investor Sweden - Equity 2017
Expert Investor Sweden - Equity 2017

Wednesday 11 October
Grand Hotel, Stockholm

Expert Investor Alternative UCITS 2017
Expert Investor Alternative UCITS 2017

Thursday 19 October
Grand Hotel Huis ter Duin, Noordwijk

OTHER STORIES FROM LAST WORD...