(Bloomberg) -- Investors are yanking cash at a record pace from the world’s second-biggest credit exchange-traded fund.
The $36 billion Vanguard Short-Term Corporate Bond ETF (ticker VCSH) has bled nearly $5.5 billion this year, the most year-to-date since its inception in 2009, data compiled by Bloomberg show. The fund, which tracks high-grade debt maturing in one to five years, is on track for an unprecedented 15th straight week of outflows.
The exodus from VCSH since early February coincides with a surge in demand for money funds, after the Federal Reserve’s interest-rate hikes lifted yields on the shortest-dated debt to the highest in decades. Now that rotation is gaining momentum amid questions around the Fed’s next step and as anxiety builds that the debt-ceiling standoff will roil markets.
“If you compare the yield on VCSH and you look at a money market, you can reduce duration, spread duration, and vol coming in the curve and maybe even pick up yield,” said Lindsay Rosner, multi-sector portfolio manager at PGIM Fixed Income. “Continued concerns over if the Fed is pausing — and then if they are pausing to cut or not — plus fears of the debt ceiling are reducing risk appetite in the front end.”
A Vanguard spokesperson declined to comment.
VCSH has earned 2.2% this year, data compiled by Bloomberg show. Its outflow is leading losses among credit ETFs this year, followed by a $2.2 billion exit from the $34 billion iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD). Roughly $478 billion has left the universe of corporate debt ETFs on a net basis this year.
The sector’s biggest offering, the $40 billion Vanguard Intermediate-Term Corporate Bond ETF (VCIT), has seen $843 million flow out.
Meanwhile, money-market funds have seen off-the-charts demand thanks to attractive rates and a haven bid spurred by the banking-system turmoil. Total assets sit at a record $5.31 trillion, Investment Company Institute data show.
The persistence and magnitude of the VCSH outflows are a relative rarity among Vanguard’s 82-fund lineup. The second-largest ETF issuer tends to cater to financial advisers and longer-term investors, whose steady allocations have helped the company increase market share for 21 straight years.
Given that investor base, it seems likely that the big move out of VCSH is the product of a model portfolio tweak, according to Bloomberg Intelligence. The off-the-shelf strategies are estimated to hold trillions of dollars, and as such, can make big waves in an ETF’s flow dynamic.
“These flows are not your average Vanguard investors but rather likely one large model making a rotation in the portfolio,” said BI senior ETF analyst Eric Balchunas. “The more Vanguard ETFs grow and the more volume they gather, the more they will attract big fish investors and models whose trading will likely obscure all the traditional do-nothing Vanguard-ian investors in the fund.”