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U.S. Weekly Fund Flows Insight Report: Investors Withdraw Assets From Funds For The Third Week In Four

Hello! For this week's ETF Wrap, I caught up with Michael Arone, State Street's chief investment strategist, at the Exchange ETF conference in Miami. He shared his take on bonds as ETF investors look for clues as to when the Federal Reserve may cut interest rates.

U.S. Weekly FundFlows Insight Report: Equity ETFs Start 2024 With 14th Straight Weekly Inflow

iShares iBoxx $ High Yield Corporate Bond ETF has performed well, generating a total return of 13% since we initiated our bullish view in November 2022. However, we now see increasing risks that market sentiment may be getting ahead of itself and potentially bordering on extreme greed. Fed Funds futures indicate that traders are already pricing a 39% probability of 6 rate cuts (150 basis points) by the end of the year.

After a year when advisors were relatively cautious about taking on credit risk, sentiment seems to be shifting. In 2023, the most popular fixed income ETF was the iShares 20+ Year Treasury ETF (TLT).

HYG is the largest high-yield bond ETF in the market. It is not a particularly good choice. A look at the fund, and some better alternatives, follows.

High-volume ETFs are more liquid, meaning they can be bought or sold easily without causing a significant price change.

"We are absolutely going to see more of these options-based products come to market. We see it in our own book," BNY Mellon's Ben Slavin said.

Overall, ETFs pulled in $30.5 billion in capital last week, taking the year-to-date inflows to $361.2 billion. U.S. equity ETFs led the way higher with $21.3 billion in inflows.

The market may have peaked in July due to the lagged effects of the fastest rate hike cycle in history. A credit event is likely to occur, starting with treasuries and then moving to corporate credit, junk debt, and highly levered companies.