Volatility Fear Drives Investors to Bond ETFs -- Journal Report

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06/10/2019 | 02:18 am
Charles Schwab

By Gerrard Cowan

As Investors see increased volatility on the horizon, many believe that bond-focused ETFs can help guide them through the storm.

BlackRock Inc., the world's largest asset manager, says it has seen increased investment in a number of its fixed-income exchange-traded funds, as well as in its "minimum volatility" fund -- iShares Edge MSCI Min Vol USA ETF (USMV), a $28 billion ETF that has returned 13.3% this year through May.

Investors are looking to ETFs not so much as a haven in turbulent markets, but as a risk-management tool, says Daniel Prince, head of iShares U.S. Wealth Advisory Product Consulting at BlackRock.That explains the interest in the USMV fund by investors taking a more-defensive posture, he says.

An ETF study published by Charles Schwab & Co. in May found that 61% of ETF investors anticipate an increasingly volatile market in the second half of the year. Almost half of those surveyed -- 44% -- plan to increase their ETF investments as a result, while 34% believe it will have no impact on their holdings and 22% say it will prompt them to remove money from ETFs.

(Schwab's 2019 ETF Investor Study, the ninth such from the firm, was based on an online survey of 1,500 investors between the ages of 25 and 75 with at least $25,000 in assets who had purchased or sold ETFs in the past two years.)

Some 74% of those surveyed said it was a good time to invest in bond-focused ETFs, while 61% said they actually planned to do so. In terms of sectors, technology was a notably popular choice, with 69% planning to invest in stock ETFs in the area; the next-best performer was financial services, at 50%.

Although many see ETFs as a useful tool in volatile markets, some investors may well have planned to increase their investments anyway, perhaps for different reasons, says Heather Fischer, vice president of Charles Schwab's mutual-fund, ETF and 529 platforms. "Investors are characterizing ETFs as a tool to help them achieve their goals and ride out volatile markets, not as a 'safe haven' on their own," she says.

The Schwab research noted the importance of millennials in the ETF market: 42% of their portfolios are currently dedicated to ETFs, on average, compared with 34% for Generation X. They are also the most likely group to believe ETFs can help them through market volatility, while their interest in technology funds is a driver of the latter's popularity, according to Schwab.

The importance of the younger cohort also was a key theme of an ETF study published by Vanguard Group in March. Millennials are the biggest buyers of ETFs relative to the broader population, says Rich Powers, head of ETF product management in Vanguard's portfolio review department.

Mr. Cowan is a writer in Northern Ireland. He can be reached at reports@wsj.com.

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