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Growth in Bond Mutual Funds: A Question of Balance

By Sean Collins

April 8, 2021

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Why have bond mutual funds grown substantially in the past several years? There are two possible explanations, with very different implications:

  • One view: large inflows to bond funds have been driven by yield-seeking or return-chasing behavior. This explanation is promoted by commentators who worry that bond mutual funds could pose financial stability concerns—who fear that yield-chasing investors are likely to redeem en masse if yields on corporate bonds rise sharply and returns plummet, as might be anticipated during a financial crisis.[1]
  • The alternative view: the growth in bond fund assets has been driven more by fundamental secular trends. If this view is correct, concerns about mass redemptions should be tempered.

The evidence is strong: growth in bond mutual funds has been driven by secular trends such as stock market returns, demographics, and changes in how retirement savers invest. These trends will be described in this and the next Viewpoints. In fact, as this Viewpoints demonstrates, given the strength of those trends, what’s surprising is that investors didn’t add even more money to bond funds than they did.

Chasing Yields? Really?

Mutual fund investors, including bond fund investors, do react to market returns. But if bond fund investors have been chasing yields and returns in recent years, they’ve been doing a poor job of it. As the left panel of Figure 1 shows, from January 2010 to December 2020, investors poured a total of $1.84 trillion in new cash into taxable bond mutual funds and exchange-traded funds (ETFs) with a focus on the US market (“taxable domestic bond funds”). At the same time, they redeemed a cumulative total of almost $1 trillion from mutual funds and ETFs with a mandate to invest primarily in US stocks (“domestic equity funds”).

Figure 1
Flows to Equity and Bond Funds and Returns in Their Relevant Markets
Flows to selected equity and bond mutual funds and ETFs, January 2010 to December 2020

1 Cumulative net new cash flow to taxable domestic bond mutual funds and taxable domestic bond ETFs compared with cumulative net new cash flow to domestic equity mutual funds and broad-based (domestic) equity ETFs.

2 Annualized percentages for total market returns from January 2010 to December 2020; return on stocks is total return on the S&P 500 index and return on bonds is total return on the Bloomberg Barclays US Agg Total Return Value Unhedged USD index.

Sources: Investment Company Institute and Bloomberg

However, that was clearly not because bonds outperformed. As the right panel indicates, stocks far outperformed bonds over this period: a 14.0 percent annual average return for the US stock market, compared to 4.1 percent for the taxable US bond market.

So, the evidence that inflows have been driven primarily by yield- or return-chasing retail investors is questionable. Conversely, there’s strong evidence in favor of secular trends.

Maintaining a Balanced Portfolio

The first such trend: investors trying to keep their portfolios in balance during the long bull market in US stocks.

Figure 2
The Bull Market in US Stocks Likely Prompted Investors to Rebalance Their Portfolios
Net new cash flow and change in assets of domestic equity funds, annual, billions of dollars

Note: Domestic equity funds includes domestic equity mutual funds and broad-based (domestic) equity ETFs.

Source: Investment Company Institute

From 2010 to 2020, the bull market in stocks has powered strong growth in assets for domestic equity funds. As Figure 2 shows, in nine of the past 11 years, investors redeemed significant amounts from these funds. Nevertheless, the strong appreciation of the stock market boosted these funds’ assets far in excess of investors’ redemptions. For example, in 2017, investors redeemed $80 billion from domestic equity mutual funds, but assets in these funds increased by nearly $1.5 trillion. The same patterns were repeated—indeed, were even more pronounced—in 2019 and 2020.  

With assets in domestic equity funds rising so sharply, many investors no doubt chose to direct some of the outflows from domestic equity funds to bond funds in an effort to keep their portfolios balanced.[2] Figure 3 provides some evidence of this. From 2010 to 2020, there has been a striking inverse correlation between dollar outflows from domestic equity funds and inflows to taxable domestic bond funds.

Figure 3
Rebalancing Toward Fixed Income Boosted Inflows to Bond Funds
Net new cash flow, billions of dollars, annual

Note: The domestic equity funds category includes domestic equity mutual funds and broad-based (domestic) equity ETFs. The taxable domestic bond funds category includes taxable domestic bond mutual funds and taxable domestic bond ETFs.

Source: Investment Company Institute

This development may have been aided by automatic rebalancing tools. In recent years, investors have increasingly adopted strategies, such as model portfolios and robo-advisers, that periodically and automatically rebalance their portfolios to meet market conditions. When the stock market rises sharply, automatic rebalancing may shift investors’ balances in stocks toward fixed income or, in other words, from equity funds toward bond funds. In addition, households may tilt their periodic contributions to individual retirement accounts (IRAs) and 401(k) plans somewhat more toward bond funds.

Although investors cumulatively added more than $1.8 trillion in new flows to taxable domestic bond funds from January 2010 to December 2020, the US stock market was so strong that they arguably could have added even more.

Figure 4 illustrates this by comparing actual money flowing to taxable domestic bond funds to the amount investors should have added to maintain their 2009 allocations to bond and domestic equity funds—30 percent in bond funds and 70 percent in domestic equity funds. Investors poured a cumulative $1,843 billion in net new money into bond funds from 2010 through 2020 (dark blue). But to keep 30 percent of their assets in bond funds, they would have needed to add an additional $789 billion (light blue).[3]

Figure 4
To Maintain Balance, Households Should Have Purchased Even More Bond Funds
Net inflows to taxable domestic bond funds, billions of dollars, cumulative by year

Note: Taxable domestic bond funds includes taxable domestic bond mutual funds and taxable domestic bond ETFs.

Source: Investment Company Institute

This analysis suggests that portfolio rebalancing alone may be sufficient to explain the strong demand for bond funds in the past decade. But there are other fundamental secular factors driving that growth as well—factors that I’ll discuss in my next post.

Sean Collins is chief economist of ICI.

Other Posts in This Series

  • Bond Mutual Fund Outflows: A Measured Investor Response to a Massive Shock
  • What’s in a Name, Redux: For Bond Mutual Funds, “Corporate” Matters
  • Growth in Bond Mutual Funds: See the Whole Picture
1 See, for example, Jaewon Choi and Mathias Kronlund, “Reaching for Yield in Corporate Bond Mutual Funds,” The Review of Financial Studies (2018).

2 Redemptions from domestic equity funds may also, in part, have flowed to funds focusing on world stock and bond markets, as well as to collective investment trusts focusing on US and world stock and bond markets.

3 In 2009, the ratio of assets in taxable domestic bond funds to the total assets of taxable domestic bond funds plus domestic equity funds was 30 percent. The analysis in Figure 4 takes as given annual stock and bond market returns (as measured by the S&P 500 index and the Bloomberg Barclays US Agg Total Return Value Unhedged USD index, respectively). It also takes as given actual annual net new cash flows to taxable domestic bond funds and domestic equity funds. Given these, the analysis makes hypothetical purchases or sales of these two types of funds that are sufficient to keep the ratio of assets in bond funds at 30 percent at the end of each year. The analysis makes these hypothetical purchases or sales sequentially, taking 2009 as a starting point and proceeding year by year until 2020.

TOPICS: Bond FundBondsCOVID-19Corporate BondsFinancial MarketsFinancial StabilityFund RegulationMutual FundPolicy ResearchShareholder

Grow Your Money Skills…It’s Financial Literacy Month!

By Miriam Bridges

April 1, 2021

April showers bring…Financial Literacy Month! The ICI Education Foundation is sharing resources you can use to build your investment and savings skills. Financial literacy can lead you to greater financial well-being—and help you achieve goals such as education, home ownership, and a comfortable retirement. And those will last a lot longer than May flowers.

Read more…

TOPICS: 401(k)Equity InvestingIRAInvestment EducationInvestor ResearchMutual FundRetirement PolicySavingsShareholder

Traditional and Roth IRAs Offer Choice and Flexibility

By Sarah Holden and Daniel Schrass

March 29, 2021

Whether opened with rollovers or contributions, whether traditional or Roth, individual retirement accounts (IRAs) offer investors access to a world of investing. With $12.2 trillion in assets, IRAs represent more than one-third of total US retirement market assets and more than one-tenth of all US household financial assets. In mid-2020, 47.9 million US households, or 37.3 percent, owned IRAs.

Read more…

TOPICS: Equity InvestingIRARetirement ResearchSavingsShareholder

Fund Investors’ Expenses Are Falling on Both Sides of the Pond

By Shelly Antoniewicz, James Duvall, and Giles Swan

March 24, 2021

Data on UCITS ongoing charges have become more widely available to investors in recent years. Enhancements to costs and charges disclosures that UCITS and distributors make available to investors have provided them with a wealth of beneficial information, which we believe can be further enhanced.

Read more…

TOPICS: Equity InvestingEuropeFund RegulationICI GlobalInternationalShareholder

Growth in Bond Mutual Funds: See the Whole Picture

By Sean Collins and Shelly Antoniewicz

March 19, 2021

In the past decade, a number of regulators and academics have discussed concerns about the growth in the assets of bond mutual funds, as well as their increasing share of the bond market, especially the corporate bond market. The concern is that bond fund investors, now playing a much larger role in the bond market, might massively redeem their fund investments during a market correction, potentially amplifying market stresses. A closer look at the data, however, reveals aspects of the growth in bond funds that should help assuage such concerns.

Read more…

TOPICS: Bond FundBondsCOVID-19Corporate BondsFinancial MarketsFinancial StabilityFund RegulationMutual FundPolicy ResearchShareholder

What’s in a Name, Redux: For Bond Mutual Funds, “Corporate” Matters

By Sean Collins

March 11, 2021

Policymakers around the globe are studying the pandemic-related turmoil of March 2020 to determine what happened and why. Bond mutual funds have been one area of focus, and policymakers will be considering the data to assess whether structural reforms might be warranted. But gaps in understanding how regulated funds operate are adding to a flawed narrative about what happened last March—and are distorting analysis of the corporate and Treasury bond markets.

Read more…

TOPICS: Bond FundBondsCOVID-19Corporate BondsFinancial MarketsFinancial StabilityFund RegulationMutual FundPolicy ResearchShareholder

Bond Mutual Fund Outflows: A Measured Investor Response to a Massive Shock

By Sean Collins

March 4, 2021

In recent months, we have seen many high-profile analyses arguing that bond mutual funds amplified stresses in financial markets during the start of the COVID-19 pandemic in March 2020. These analyses conclude that bond mutual funds therefore may require structural regulatory reforms. But as the information in this ICI Viewpoints and others to follow indicates, policymakers should not jump to that hasty conclusion.

Read more…

TOPICS: Bond FundBondsCOVID-19Corporate BondsFinancial MarketsFinancial StabilityFund RegulationMutual FundPolicy ResearchShareholder

To Do: Check Your Savings Goals This Week!

By Miriam Bridges

February 22, 2021

This week, the Investment Company Institute (ICI) and the ICI Education Foundation (ICIEF) are joining thousands of corporations, nonprofits, government agencies, and individuals to celebrate America Saves Week. This annual campaign encourages Americans to assess their financial situations, set savings goals, and implement plans to achieve them.

Read more…

TOPICS: 401(k)Equity InvestingIRAInvestment EducationInvestor ResearchMutual FundRetirement PolicySavingsShareholder

All You Need Is Love…and a Spousal IRA

By Sarah Holden

February 11, 2021

As you’re racking your brain to find that perfect Valentine’s Day gift, you might want to consider, whether for yourself or your spouse, a contribution to an individual retirement account (IRA).

Read more…

TOPICS: IRARetirement ResearchSavingsShareholder

Main Street Owns Wall Street

By Sarah Holden and Michael Bogdan

February 10, 2021

Stock ownership used to conjure up images of Wall Street—but today people all up and down America’s Main Streets own stocks and are counting on stock ownership to help realize their financial goals. Today, more Americans own stock than in the past—and stock ownership has become increasingly common for lower- and middle-income households.

Read more…

TOPICS: Equity InvestingInvestor ResearchMutual FundRetirement PolicySavingsShareholder

Mutual Funds: Rated G—All Audiences Admitted

By Sarah Holden and Dan Schrass

February 4, 2021

Investing is subject to many misconceptions, including the notion that only older households, or only wealthy households, or only households saving for retirement own mutual funds. The reality is that households of all ages, all incomes, and with a wide range of financial goals, own mutual funds.

Read more…

TOPICS: Investor ResearchMutual FundRetirement PolicySavingsShareholder

Survey Confirms: Despite COVID-19, Retirement Savers Protect Their Accounts

By Sarah Holden and Daniel Schrass

February 2, 2021

A new national survey by ICI addresses how Americans responded to the financial pressure since the onset of the COVID-19 pandemic, with special emphasis on whether they’ve tapped their retirement accounts. The results show that a strong majority (65 percent) of US individuals did not take financial actions as a result of COVID-19.

Read more…

TOPICS: 401(k)COVID-19Financial StabilityIRARetirement Research

Understanding Indexes and How Funds Use Them

By Matthew Thornton

January 28, 2021

Beyond the well-known indexes that we encounter daily lie more than three million indexes designed to reflect the performance of underlying investments, from broad markets to niche subsegments. Indexes vary widely with regard to their specific objectives, the methodologies on which they are built, and the underlying investments they reflect.

Read more…

TOPICS: Equity InvestingExchange-Traded FundsFinancial MarketsFund RegulationIndex Fund

2020 Annual Report to Members: A Conversation with IDC Managing Director Thomas Kim

By Thomas Kim

January 21, 2021

As Thomas Kim finished his first year as IDC's managing director, he sat down to discuss the organization’s priorities.

Read more…

TOPICS: Fund GovernanceIDC

2020 Annual Report to Members: Roundtable: The Fund Industry’s Response to COVID-19

By Patrice Bergé-Vincent, Marty Burns, and Susan Olson

January 19, 2021

For the 2020 Annual Report to Members, three members of ICI’s leadership sat down to share their thoughts on how the Institute and the fund industry have navigated the COVID-19 crisis.

Read more…

TOPICS: Financial MarketsFinancial StabilityFund RegulationGlobalGovernment AffairsICI GlobalIndex FundInternationalInvestor ResearchMutual FundPolicy ResearchRetirement PolicyShareholder

2020 Annual Report to Members: A Conversation with Paul Schott Stevens

By Paul Schott Stevens

January 14, 2021

Paul Schott Stevens, ICI’s longest-serving chief executive, retired at the end of 2020. As he neared the end of his 16 years of service, he sat down with ICI staff to discuss the events of his tenure.

Read more…

TOPICS: Financial MarketsFinancial StabilityFund RegulationGlobalGovernment AffairsICI GlobalIndex FundInternationalInvestor ResearchMutual FundPolicy ResearchRetirement PolicyShareholder

2020 Annual Report to Members: A Letter to ICI’s Membership

By George C. W. Gatch

January 11, 2021

2020 will go down in history as a year that none of us can ever forget. It was a year of turmoil, fear, and reckoning. Yet for the regulated fund industry, it also proved to be a year of resilience, transition, and great hope.

Read more from ICI Chairman George C. W. Gatch’s letter that was released in ICI’s 2020 Annual Report to Members.

Read more…

TOPICS: Financial MarketsFinancial StabilityFund RegulationGlobalGovernment AffairsICI GlobalIndex FundInternationalInvestor ResearchMutual FundPolicy ResearchRetirement PolicyShareholder

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