Displaying items by tag: active etfs

Active bond funds are essential for a well-diversified investment portfolio, providing income and cushioning against market downturns. In 2022, bonds demonstrated their resilience, with most fixed income categories performing better than the broader stock market. However, bond values are inversely related to interest rate changes, so with rates projected to rise, focusing on short- to intermediate-term bond ETFs is advisable. 

Active bond ETFs, such as Pimco’s Active Bond ETF (BOND), offer diversified exposure and professional management, helping investors navigate volatile markets. If you want to shorten the duration Pimco’s Enhanced Short Matruaity Active ESG ETF (EMNT) might provide a more robust alternative with ESG exposure. 

Despite higher costs, active management can be beneficial, especially in uncertain economic conditions, making these funds a strategic addition to long-term investment portfolios.

Finsum: Duration risk is especially important in this current climate and because interest rates could fall quickly in the next year depending on the Fed’s decisions.

In the past few years, the bond market has experienced increased turbulence as the U.S. Federal Reserve embarked on an unprecedented tightening cycle, successfully driving down inflation from 9.1% in June 2022 to 3.4% by the close of 2023. Despite the Fed's efforts to maintain stability since July 2023, fixed-income markets remain volatile, particularly in the 10-year U.S. Treasury yield. Throughout 2023, bond yields underwent significant fluctuations, reflecting market instability despite ending the year close to where it began.

Looking forward, uncertainties persist regarding economic growth and interest-rate policies, emphasizing the need for active management within fixed income. Prioritizing high-quality investments remains crucial amid mixed economic indicators and narrowing high-yield spreads, suggesting a prudent approach to portfolio diversification. 

Furthermore, strategies involving duration positioning and sector rotation offer opportunities for active managers to capitalize on shifting market dynamics, highlighting the importance of adaptability and responsiveness in navigating bond markets.

Finsum: Fund managers can lean into historical analysis and precedent in volatility and factor selection could lead to more robust returns for active management.

State Street is bullish on fixed income. It believes that institutions should take advantage of attractive yields and that macro conditions are improving, albeit in an uneven fashion. Investors can achieve their diversification, return, and income goals without compromising on credit quality.

Many pensions have been able to close or shrink their funding gaps due to higher yields from Treasuries and investment-grade corporate debt. At current valuations, bonds are able to more effectively function as a hedge against weaker economic growth and serve as an effective hedge against equities. 

State Street sees the economy in a sideways period for rates and inflation. Therefore, it recommends that investors get long duration and see a more favorable environment eventually emerging for borrowers. It forecasts that inflation and Fed rates will end the year lower, providing a tailwind for fixed income.

In terms of active vs. passive strategies for fixed income, State Street takes a nuanced approach. It believes that in certain sectors, capable active managers have proven to add value. But this alpha has been shown to erode over time.

State Street has built a systematic approach towards fixed income which uses a rules-based approach. It weighs factors like value, sentiment, and momentum. It sees considerable benefits to increased electronic trading for fixed income, which has resulted in more data and liquidity. 

Finsum: State Street is bullish on fixed income due to attractive yields and an improving macro environment. In terms of active vs. passive fixed income, it takes a nuanced view.  

Active ETFs have been steadily gaining market share from mutual funds, experiencing a consistent 20% growth in assets annually over the past five years, reflecting investors' growing preference for the cost-efficient and adaptable nature of ETFs. During this period, they have expanded their share of the overall ETF market, skyrocketing from 2% to 8.5%, as indicated by Morningstar's recent analysis on actively managed funds.

 Despite their current assets standing just above $600 million amidst the $8.9 trillion U.S. ETF landscape, they are advancing at a faster pace than both the overall market and their passive counterparts. Investors have injected $375 billion into actively managed ETFs in the last five years, while active mutual funds have witnessed a staggering outflow of $1.8 trillion, according to Morningstar's data.

Investors can anticipate continued growth for active ETFs, asserting their burgeoning prominence within the fund industry, fueled by investor demand and their role in alleviating the outflows from active mutual funds.

Finsum: Investors tend to think pickers have their largest advantage in volatility and macro environments, so this trend could continue. 

In Q1, inflows into active fixed income ETFs exceeded inflows into passive ETFs at $90 billion vs. $69 billion. This is a remarkable change from last year, when active fixed income ETFs had net inflows of $19 billion vs. $279 billion for passive bond ETFs.  

Two major factors behind this development are an increase in uncertainty about the economy and monetary policy and yields above 5% for some of the most popular offerings. According to Ryan Murphy, the head of fixed income business development at Capital Group, this is the beginning of “a longer multi-quarter and potentially multi-year trend out of cash. Investors are getting the best compensation on fixed income in 20 years.” 

Flows could accelerate into bond funds as there is $6 trillion in money market funds once the Fed actually starts cutting rates. Yet, the current ‘wait and see’ period is challenging for fixed-income investors, but it’s an opportune moment for active strategies given opportunities to find distortions in prices and credit quality. Stephen Bartolini, portfolio manager at T. Rowe, notes, “The ability to not just blindly buy the index but be smarter and choose around security selection is critical at the moment.” 

Finsum: Active fixed income inflows were greater than inflows into passive fixed income ETFs. It’s a result of attractive yields and heightened uncertainty about the economy and monetary policy.