Bond Funds Take the Lead in H1 2023 Inflows

In the first half of 2023, the world witnessed the highest bond yields in nearly two decades, attracting significant capital into fixed-income investment funds. The surge in global yields was driven by inflation-fighting central banks, which continued to raise interest rates, resulting in higher yields for bonds. As a result, net inflows into bond mutual funds and exchange-traded funds (ETFs) worldwide reached a staggering $236 billion during this period, as reported by Morningstar. Notably, the majority of these bond fund investments came from the United States.

While rising yields have generally hampered the performance of bond funds, investors appeared eager to capitalise on the higher repeating income stream provided by interest rate hikes. This trend was particularly evident in the U.S., where the 10-year Treasury yield surpassed 4% for the first time since the global financial crisis of 2008-09, remaining at similar levels since then.

On the flip side, other asset classes experienced net redemptions due to concerns about a potential recession and banking system instability. Global equity funds witnessed net outflows of $83 billion, and allocation funds with mixed equity and bond exposures faced redemptions of $64 billion. Furthermore, funds dedicated to alternative assets and commodities saw net outflows of $30 billion and $6 billion, respectively.

Investors continued to show a preference for inexpensive ETFs, with monthly net inflows persisting for nearly a decade. However, open-end mutual funds and index funds experienced net outflows in 16 out of the last 18 months. Actively managed ETFs, aiming to outperform tracking indexes, gained traction during H1 2023, with assets growing at a rate of 14%, compared to 3% for passive ETFs.

An interesting trend emerged in favour of sustainable investment funds, with $51 billion in net inflows during the first half. These funds focus on companies and investments aligned with sustainability goals, and their assets now amount to $2.8 trillion, representing 7% of all global long-term investment assets. In contrast, non-sustainable or unclassified funds attracted only $2.4 billion in net inflows.

Among all funds and ETFs, the Vanguard 500 Index Fund stood out with a remarkable $18 billion in net inflows during H1 2023. Vanguard dominated the top five funds and ETFs in terms of net inflows during the same period. While passive investment strategies typically represented most ETFs, actively managed ETFs seeking to outperform tracking indexes saw increased interest, growing at a rate of 14%, compared to 3% for passive ETFs. JPMorgan Large Cap Growth Fund led among active funds, attracting $13 billion in net inflows during H1 2023.