This article was written by Bloomberg Intelligence ETF Analyst Athanasios Psarofagis. It appeared first on the Bloomberg Terminal.
Buying the dip has largely dried up for equity ETFs since 2022, but the strategy of investing in underperformers in hopes of a rebound appears to be re-emerging in fixed income. The year’s worst-performing bond ETFs are taking in the most flows in the category — some tied to shorting — as investors bet on the possibility of Federal Reserve rate cuts.
Performance-chasing in stocks, dip-buying in bonds
With many bond ETFs underwater this year and the benchmark iShares Core U.S. Aggregate Bond ETF (AGG) in a 17% drawdown from its all-time high, investors have been buying the most beaten-up names (decile 10) in hopes of a rebound if interest rates drop. In equities, by contrast, flows have gravitated to the best performers.
Short bets increase against more beaten-up ETFs
Some organic ETF flows can stem from “create to lend,” or the creation of shares to lend out for shorting purposes. Shares held short have spiked the most this year for ETFs in the worst-performing decile, meaning that investors have increased bets on declines. Given the extreme reading, there could be aggressive short covering if ETFs in the bottom decile start to outperform.
Ark, long-duration bonds are most stretched ETFs
ETFs that are most overextended to the downside — defined as furthest away from their 50-day moving averages — include long-duration bonds, genomics and clean-energy ETFs.
