July saw a slowing of inflows into fixed income ETFs, while inflows into equity ETFs ramped higher. $17 billion flowed into bond ETFs which was dwarfed by the $43 billion of inflows into equity ETFs. For the month, the 3 most popular fixed income ETFs were the iShares Core US Aggregate Bond ETF, the Vanguard Total Bond Market ETF, and the iShares 20+Year Treasury Bond ETF. 

This isn’t totally surprising given the poor performance of bonds in recent months due to a surprisingly resilient US economy which is leading to increased odds of more hikes and higher rates for longer and decreased odds of a Fed rate cut and continued cooling of inflation. In contrast, equity markets have been on fire with the S&P 500 now closing in on it's all-time highs from January 2022 while many tech stocks and indices are already at new highs. 

Overall in 2023, the share of inflows has been pretty balanced between fixed income and equity ETFs which is a new development as typically equity ETF inflows dominate. This is largely due to investors wanting to take advantage of higher yields and advisors and institutions becoming more comfortable with fixed income ETFs. 

Finsum: There was a slowdown of inflows into fixed income ETFs in July due to increasing volatility and more uncertainty about the Fed’s rate hike path.

For Vettafi’s ETF Database, James Comtois discusses the democratization of direct indexing due to technology and increasing popularity. Initially, direct indexing was only available for ultra high net-worth investors due to its cost and complexity. Yet, technology and financial innovations have now made it quite easy, and we are seeing many firms offer it to clients with as little as $10,000 to invest. 

A key to it becoming accessible for investors with smaller accounts is the reduction in trading costs. The optimal direct indexing strategy is to regularly scan an account for tax loss harvesting opportunities which can be used to offset capital gains. This leads to increased trading activity as these positions are replaced with other stocks that have similar factor scores. However, this is only feasible for smaller accounts due to the drastic decline in transaction costs over the last decade. 

Not surprisingly, nearly every advisorship is adding these offerings. At the Exchange 2023 Conference, Vanguard CEO Tim Buckley exclaimed that Vanguard will “be investing heavily” in direct indexing and that every advisor should consider “using direct indexing for their taxable client accounts.” Currently, $260 billion of client assets are being managed with direct indexing. This figure is expected to exceed $1 trillion over the next decade, underscoring the opportunity for advisors and risk for those that are left behind.

Finsum: Direct indexing has become increasingly accessible to smaller investors over the last couple of years due to increased demand, technology, and decline in trading costs. 

LPL is partnering with MSCI to add direct indexing capabilities to its suite of model portfolios. Advisors will be able to access these features through custom indexed separately managed accounts. Direct indexing is a growth market for advisors due to its ability to provide tax savings in down years, a slight increase in returns, and more personalization.

The company made the announcement at its Focus 2023 event. LPL is currently the largest independent broker-dealer in the United States with nearly 20,000 advisors and over $1.1 trillion in assets. 

Rob Pettman, executive VP of Wealth Management Solutions said that “Investors want the ability to customize their investment strategy in order to achieve a range of goals, including reducing overall tax burden and/or avoiding a particular sector or security.”

The new offering will have a $100,000 minimum and include models for large-caps, small-caps, mid-caps, and international stocks. They will have the MSCI USA and EAFE indices as the basis for these portfolios. 

There will also be an option for automatic tax-loss harvesting which can be optimized according to each client’s portfolio. Overall, the firm believes that direct indexing will also help with attracting and retaining clients especially with nearly all of LPL’s competitors offering direct indexing. 

Finsum: LPL joined the model portfolio race and is partnering with MSCI to offer a variety of options and capabilities. 

The second quarter of the year has witnessed a remarkable surge in technology sector earnings, underscoring the sector's resilience and growth potential. Against this backdrop, the mutual fund TRCBX, managed by T. Rowe Price, emerges as an attractive investment option for investors seeking to capitalize on these robust earnings and position themselves for potential gains.

Technology giants have reported impressive financial results in Q2, with earnings surpassing expectations and reflecting the sector's ongoing innovation and adaptability. As companies continue to leverage technology in response to evolving market dynamics, investing in TRCBX becomes a strategic move to ride the wave of this upward momentum.

TRCBX, being a technology-focused mutual fund, aligns perfectly with the prevailing trends. T. Rowe Price's experienced fund managers possess a keen insight into the intricacies of the technology sector, enabling them to select companies poised for sustained growth. By investing in TRCBX, investors gain access to a diversified portfolio of leading technology companies, spreading risk while tapping into the potential for significant returns.

Moreover, the strong Q2 earnings have solidified the technology sector's role as a key driver of the global economy. As digital transformation accelerates across industries, the demand for innovative technology solutions is set to soar. TRCBX's strategic allocation in this sector positions investors to benefit from this broader market shift and the resulting growth opportunities.

One of the biggest surprises of 2023 has been the incredible strength of equities with the S&P 500 up 18% YTD, and many stocks and sectors actually making new all-time highs despite numerous headwinds such as high inflation, a hawkish Fed, and middling economic growth. 

Yet, this rally has seen the bulk of outperformance from the technology sector, while cyclical parts of the market such as energy have lagged. However, there are signs that this could be changing especially following the energy sector’s strong performance over the last month as evidenced by XLE’s 8% gain. 

The larger impetus for cyclical stocks has been growing recognition that the US will likely avoid a recession in 2023. Energy stocks have also had other catalysts such as strong earnings reports from behemoths like Chevron and Exxon Mobil. Additional catalysts could be supply cuts from OPEC+ and the US refilling its strategic petroleum reserve (SPR).

 The sector also remains attractive from a valuation perspective. Currently, XLE has a price-to-earnings ratio of 8 and a dividend yield of 3.7%. Compare this to the S&P 500’s price to earnings ratio of 25.8 and yield of 1.5%. 

Finsum: The energy sector has enjoyed strong performance over the last month due to a spate of strong earnings reports and increasing signs that the US will avoid a recession.