Fixed-income ETF hit with biggest outflow in 15-year history

As stocks boogied to the risk-on beat Wednesday, investors in the world’s third-largest fixed-income ETF left the party at a frenetic pace.

The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) was hit by a record $921 million outflow, the largest daily redemption since its 2002 inception, and the most among U.S.-listed passive vehicles across asset classes.

At 2.7%, it represents the largest post-crisis withdrawal as a share of total assets at the start of the session for the high-grade, dollar-denominated fund. It now manages $33 billion.

BlackRock's iShares​ unit added three ETFs to its lineup of investment-grade corporate bond funds.
A monitor displays BlackRock Inc. signage on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Tuesday, Jan. 17, 2017. U.S. stocks fell as markets reopened after Monday's holiday as financial and health-care shares declined and the U.S. dollar headed for the biggest single-day loss since July. Photographer: Michael Nagle/Bloomberg
Michael Nagle/Bloomberg News

And it comes on the heels of last week’s record redemption, underscoring souring sentiment toward the asset class on U.S. interest rate risk.

The number of U.S. rate hikes expected by investors from now until the end of next year has risen to four in the wake of yesterday’s inflation data.

While corporate bond spreads have remained relatively stable in the recent equity turmoil, investors in higher-beta credit ETFs — which ebb and flow with the global tide of risk appetite — are shunning longer-duration debt.

Higher U.S. real rates and inflation premiums threaten to erode returns in corporate debt markets, while motivated sellers forced dealers to absorb supply.

Rising yields pose a larger threat to LQD than many of its peers. At 8.68 years, its modified duration — a measure of its sensitivity to changes in interest rates — is well above that of the iShares Core U.S. Aggregate Bond fund (AGG), a broader gauge of the U.S. fixed-income market.

Bloomberg News
Fixed income ETFs Asset managers Risk analysis Risk tolerance Bond funds Passively managed products Interest rate risk iShares Money Management Executive
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