Economy
Active ESG Bond ETFs may be a mouthful, but they are also where the market is headed. Most passive bond ETFs have been left in the dust tracking big indexes and getting killed on rising rates with too much exposure to government bonds. Active bond funds have a wider array of maneuvers, and can act more swiftly in order to keep pace with the market. The case for active equity is more difficult, but in macro environments and when so many investors are moving rapidly into ESG fund managers have an edge at selecting bonds that will outperform. The additional exposure to ESG is a subsector that has outperformed market benchmarks because of the rising demand from a new wave of investors. Additionally fund managers seem to outperform within ESG as well because they have a more discerning eye.
Finsum: There has been a second coming for active ETFs and that will only continue if the Fed has to stomp on the brakes.
Direct indexing is an investment strategy where investors own the underlying components of the index, and is rapidly widening in popularity. The full potential may yet to be unleashed however because the strategy could develop as a way to increase charitable contributions. Custom indexing could be used as a means to increase charitable flexibility by gifting stocks or bonds that couldn’t be traded in a comparable ETF. In addition to giving for charity investors could select stocks or bonds that have exhibited losses in order to offset the taxable amounts. This benefit could be double-sided, because charitable contributions reduce tax burden as well. A financial advisor in conjunction with a CPA could harness the full power of direct indexing to maximize investor alpha.
Finsum: While deciding between cash and equity charitable givings is difficult, direct indexing adds a whole new dimension to charitable giving that could unlock new potential.
Some seasoned stock market investors may be calling to buy the dip, but BlackRock just isn’t there yet. The world’s largest asset manager says that valuations just aren’t there yet and assume that in combination with the Fed tightening cycle and thin profit margins there is too much risk. The confluence of factors among inflation, Ukraine-Russia War, and Fed tightening have sent volatility shockwaves through bond and equity markets in the last couple of months. There are other investors who see it the same way as BlackRock, and want a much more prominent spike in the VIX in order to prompt a buy back. The bearishness isn’t completely pervasive as analysts on average are expecting profits to grow by over 10% across the S&P this year.
Finsum: The Euro area could already be in a recession in large part due to the war, which could drive more value in US assets or trigger a recession stateside.
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There is no hiding the huge influx in passive investing over the last couple of decades as a direct result of the ETF boom, but the rise in passive investing is causing more market volatility according to a new academic study. Theoretically with more passive investors active traders will become more aggressive and individual stock demand should be unchanged, but according to the study by UCLA it has increased market vitality and reduced efficiency. Even the skyrocketing number of algorithmic traders can’t offset the passive investors. Markets have far fewer signals and traders to rely on to gain underlying information about a stock, which creates an empty void that is filled up with volatility. Moreover, the paper speculates that as more ESG funds popup this will exacerbate the passive volatility problem.
Finsum: Passive investing has surely increased the average trader's utility, but it comes at the cost of a more efficient market and higher future volatility.
Environmental, social, and governance investing has morphed into a behemoth says, industry insiders, and is so far from its roots that a course correction is needed. Experts and pioneers in the field are disappointed by the amount of greenwashing and fudging in order to meet regulatory standards. ESG has ballooned to approximately $40 trillion and most of the gains have come in the last year. Those in the field want better oversight from the government or non-profit third parties rather than those incentivized to be more lenient. Original ESG was created to mitigate environmental risk and incentivize better behavior, but it’s so over bloated and bound to burst. If regulators in the Biden admin step up like they are signaling it could mean catastrophe for ESG investing.
Finsum: More stable guidelines to remove greenwashers are a must, but it will come at a cost.
Advisors know it intuitively: all stocks are not created equal, even those that look very similar on the surface. Yet, figuring out which to hold out of an ever-expanding assortment is a challenge. Enter an ideal solution: Nasdaq Dorsey Wright’s Technical Attribute Stock Ranking System.
Over its substantial history, Nasdaq Dorsey Wright has created many innovative technical indicators based on Point and Figure charting. One of their best is the “Technical Attribute” ranking, which applies a 0-5 score for every stock (5 being best) based on compiling multiple factors, such as relative strength versus the S&P 500 and relative strength versus an equal weighted index of the stock’s sector, among others. In total, each stock has five scored attributes, including two vs. the market and two vs. the sector, with one additional absolute attribute (trend). The best stocks succeed in all five measures.
Nasdaq Dorsey Wright has done extensive testing on the effectiveness of the system, and over multiple decades, high-scoring stocks have been proven to outperform lower-ranking stocks. The point of the Technical Attribute Stock Ranking System is to help advisors choose the best stocks they can, especially when making an intra-sector choice or picking between a few seemingly similar funds. By seeing which fund holds the highest concentration of 5s, advisors can be confident in the potential for outperformance.