Over the past year, flows in mutual funds and exchange-traded funds combined have told a disparate story — $293.2 billion has gone into bonds, while just $4.5 billion has found its way into U.S. equities. The S&P 500 has gained 17.4 percent during the 12-month period and government bond funds tracked by Morningstar have collectively returned less than 1 percent.
Morningstar analyst Kevin McDevitt attributes the flow trend to investors looking for “risk reduction.”
Many investors have been turning to so-called ultra short-term bond ETFs in an effort to brace against higher interest rates. The JPMorgan Ultra-Short Income ETF, for instance, though only on the market for a little over a year has taken in $2.2 billion of investor cash in 2018, but is barely positive in returns.
“Ultrashort funds offer better protection from rising interest rates, while long-government funds have long been one of the best diversifiers for U.S. equities,” McDevitt said. “They have often had a negative correlation with U.S. stocks, particularly in equity downturns.”
Bond funds generally fare poorly in rising rate environments as prices move opposite yields. Shortening duration is one way of bracing against inflation.
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