Direct indexing is in the midst of a boom due to increasing awareness of its benefits from investors and adoption by advisors. Some of the major benefits for clients are increased tax efficiency and more personalization while remaining diversified with low costs. For advisors, it’s an opportunity to add value to clients and provide more specialized services. Overall, it’s estimated that direct indexing can add between 30 and 50 basis points in annual returns.

However, most continue to think of direct indexing in terms of equities, but the technology can also be applied to fixed income. With stocks, most direct indexing strategies are based on re-creating an index within a separately managed account with some adjustments to better fit a client’s financial needs and goals.

In contrast on the fixed income side, indices are not replicated, but it can provide more control, flexibility, and personalization. They can also find increased tax efficiency through regular portfolio scans just like with equities to harvest tax losses which can be used to offset capital gains in other parts of the portfolio. Another benefit is that investors can fine-tune their fixed income portfolios and optimize for different characteristics such as duration, credit risk, income, or geography. 

Finsum: Direct indexing is in the midst of a boom. While many are now familiar with its benefit for equities, it can also be used with fixed income. 

A skirmish over fees preceded the long-awaited SEC approval of Bitcoin ETFs, which finally arrived on January 10th. Just days before the historic green light, applicants, including BlackRock and ARK, amended their proposals, slashing or eliminating management fees to woo early investors. This sudden fee competition presents a unique opportunity, favoring those who invest in these ETFs first.

BlackRock's ETF, for instance, carries a 0.30% annual fee, preceded by a mere 0.20% introductory rate for the first year or $5 billion in assets under management (AUM). ARK amended their application, indicating they would waive their 0.25% fee during an introductory 6-month period for the first $1 billion in AUM. These pricing moves reflect the intense competition brewing in the nascent Bitcoin ETF space.

Why the sudden price drop? One answer lies in the inherent simplicity of Bitcoin ETFs. Unlike traditional, diversified index funds with hundreds of securities, these products hold primarily just one asset – Bitcoin. This reduces complexity, leaving ample room for fee compression. Consequently, fees are poised to become a differentiator, influencing investor decisions in this uncharted territory.

However, navigating this new landscape requires caution. Investors should closely scrutinize underlying investment structures and track records of issuers. Due diligence is paramount when navigating this rapidly evolving space.

Finsum: The era of cryptocurrency ETFs begins with a race to lower fees, with many initial issuers slashing fees during introductory periods.

A recent report on real estate holdings of institutional investors revealed that while their allocation to the asset class remained level from 2022 to 2023, the allocation in the preceding decade increased by 190 basis points, a jump of 20%.

Historical data underscores the potential benefits of private real estate. A whitepaper from TIAA—a respected organization established by Andrew Carnegie in 1918 to support teacher retirements—highlights the performance of private real estate over a two-decade span. From 2000 to 2020, private real estate exhibited a very low correlation with stocks, bonds, and listed REITs. This suggests that incorporating private real estate into a portfolio could enhance diversification, which is crucial for managing risk.

Moreover, private real estate has traditionally been an effective hedge against inflation. As inflation erodes the purchasing power of money, the tangible asset class of real estate often sees its value and the income it generates keep pace with or exceed inflation rates, thereby preserving the real value of an investor's income.

For financial advisors, the strategic inclusion of private real estate in client portfolios can provide a twofold advantage: diversification benefits and protection against inflation. This can be especially valuable during periods of market volatility and rising prices, helping clients to achieve a more stable and resilient investment outcome.

Finsum: Real estate’s diversification and inflation hedging benefits are among the reasons why institutional investors continue to maintain their increased allocation to the asset class.

For investors nearing or in retirement, navigating the delicate balance between capital preservation and growth can be a tightrope walk. While holding ample cash provides comfort during market downturns, it risks missing out on potential gains. Enter the buffer ETF, a unique investment vehicle offering shelter from storms while still allowing a path to sunshine.

These ETFs, also known as defined outcome ETFs, employ options to create a buffer against market declines. A typical fund might protect holders against, say, the first 9% of losses. But just like insurance, this protection comes at a price.

Unlike regular ETFs that track an index precisely, buffer ETFs also cap their upside potential. So, if the market soars, the fund will only capture a percentage of that gain. It's a trade-off: limited sunshine for guaranteed cover during rain.

Of course, buffer ETFs aren't a magic bullet. Their complexities require careful research. Fees, the specific buffer and cap levels, and the underlying index all affect their performance. As popular as the concept has become in recent years, more than 200 of these funds now exist offering a wide range of features. For advisors looking for a way to offer their clients downside protection, buffer ETFs are worth a look.

Finsum: A new category of exchange traded funds, buffer ETFs, has been growing in popularity due to their downside protection and ability to share in upside gains.

2024 has started off with a bearish tone for the energy sector amid concerns of a supply glut and weakening demand. On Monday, crude oil prices dropped 4% as Saudi Arabia reduced prices for Asian customers by $2 per barrel. 

This is leading to speculation that Saudi Arabia could be looking to regain market share by punishing US producers and undercut cheaper Iranian and Russian oil. It could lead to a similar situation as 2020 when oil prices collapsed as Saudi Arabia flooded the market to punish other producers. Currently, the US is producing 13.2 million barrels per day of oil and has been restocking inventories and increasing exports. Others see it more as the consequence of a weak demand environment and a reflection of a decelerating economy. 

Energy prices had been higher to start the year amid an increase in geopolitical tensions. These include Houthi rebels attacking commercial vessels in the Red Sea and the escalations in the war between Israel and Hamas which could turn it into a larger, regional war. However, these concerns are being dwarfed by the supply and demand picture as evidenced by West Texas crude oil at $70 per barrel. 

Finsum: Oil prices dropped as Saudi Arabia announced that it would be reducing prices for Asian customers. Some believe that the country could be acting to protect market share. 

There’s been an ongoing debate about passive strategies vs active strategies in equities and fixed income. While passive strategies have generally proven to outperform in equities, the same is not true for fixed income. In fixed income, active managers have outperformed. Over the last decade, the average active intermediate-term bond fund has outperformed its benchmark, 60% of the time. 

According to Guggenheim, this can be partially attributed to risk mitigation strategies which are not available in passive funds. Another factor is that the equity markets are much more efficiently priced than fixed income since there is more price discovery, publicly reported financials, and a smaller universe of securities. Equities are also dominated by market-cap, weighted indices.

Relative to equities, there is much less information about fixed income securities, less liquidity and price discovery, a larger market at $55 trillion vs $44 trillion, and many more securities especially when accounting for different durations and credit ratings. Additionally, less than half of fixed income securities are in the Bloomberg US Aggregate Bond Index (Agg) benchmark. All of these factors mean that there are more opportunities to generate alpha by astute active managers. 

Finsum: There is an ongoing debate on whether active or passive is better for fixed income. Here’s why Guggenheim believes that active will outperform against passive. 

Institutional investors and money managers came together at the annual PERE America Forum and shared some thoughts on the private real estate market. The overall sentiment is that conditions will remain challenging until 2025 due to a large amount of commercial real estate debt that needs to be rolled over or refinanced at much higher rates.

According to John Murray, the head of PIMCO’s global private commercial real estate team, the situation is as bad as the Great Financial Crisis in terms of dislocations in capital markets. He notes that Fed policy is the major headwind, and its ‘crushing’ sentiment and liquidity. 

Sajith Ranasinghe, head of real estate at Church Pension Group, remarked that price discovery has been limited so investors are focusing more on income. He also expressed interest in private REITs which are down over 30% since rates began moving higher in 2022. 

Saul Lubetski, the vice-chairman of Harbor Group International recommends a ‘scalpel approach’ as $1.5 trillion of maturities are set to expire by 2025. He notes that the refinancing has already begun, albeit at a smaller and slower pace which should accelerate this year. However, it’s increasingly evident that borrowers are finally making peace with higher rates. 

Finsum: At the annual PERE conference, institutional investors and money managers gathered to share some thoughts on the private real estate market.

Exchange-traded funds (ETFs) have revolutionized the asset management landscape over the past decade, and their rise shows no signs of slowing. As Oliver Wyman's 2023 report, "The Renaissance of ETFs," underscores, ETFs have become the single most disruptive trend in the industry. By the end of 2022, total ETF assets under management (AUM) in the US and Europe reached a staggering $6.7 trillion, propelled by a 15% compound annual growth rate (CAGR) since 2010.

While passive ETFs currently dominate the market, holding 59% of assets (at the end of 2022), Oliver Wyman predicts a surge of active strategies. The report posits that the ETF landscape is entering a "next stage of growth," fueled by the emergence of innovative active ETFs.

Several factors contribute to the enduring appeal of ETFs in the US. Compared to mutual funds, ETFs enjoy lower investment minimums, typically lower expense ratios, and attractive tax advantages, making them highly accessible and cost-effective options.

Oliver Wyman projects this momentum to continue, with ETF growth remaining in the 13-18% annual range for the next five years. By 2027, they expect ETF AUM in the US and Europe to reach an impressive $12-$16 trillion, solidifying their position as a powerful force shaping the future of asset management.

Finsum: Active ETFs are poised to fuel the growth of this popular investment vehicle, according to global consultancy Oliver Wyman.

The U.S. Department of Labor's proposed redefinition of what triggers fiduciary status for retirement plan advisors and providers is drawing intense scrutiny from industry professionals, with concerns about its potential impact on information access and plan creation.

Prior to the January 2nd deadline for public comments, prominent figures like Ed Murphy, president and CEO of Empower, have voiced their opposition. A central worry surrounds the chilling effect of the new definition on certain conversations between providers/advisors and plan sponsors/participants. Fear of inadvertently triggering fiduciary status may lead many to withdraw from such communication, effectively cutting off a crucial source of information for those navigating retirement and plan decisions.

Murphy's point, highlighted in a recent planadviser.com article, illustrates this concern: "The proposal would create obstacles to plan creation and could effectively ban many sales conversations between providers and plans or individuals."

However, Tim Hauser, the DOL's deputy assistant secretary for program operations, maintains that the proposal is not meant to regulate routine "hire me" (sales) discussions. He has actively sought industry suggestions on language revisions to better clarify this intent.

Finsum: Defined Contribution professionals share their concerns with the Department of Labor regarding their proposed rule regarding what communication triggers fiduciary status.

For advisors contemplating switching to a new broker-dealer, carefully evaluating the candidate firms' technology platforms is essential. Their robustness and capabilities can directly influence both advisor success and client trust. Below are three areas to consider.

The Roadmap to Tomorrow: Does the broker-dealer prioritize continuous investment in platform upgrades and new features? Do they have a clear vision for the future of their tech offerings? Knowing where the firm is headed is as essential as knowing where it currently stands.

Growth without Growing Pains: Platforms should facilitate growth, not hinder it. Assess the platform's scalability. Can it handle your growing client base and evolving service needs? Can it be customized to your specific workflows and strategies?

Trusting the Vault: Advisors cannot afford to gamble with client security. Investigate the firms' cybersecurity protocols and data privacy policies. Are they robust and up to date? Do they prioritize data encryption and access control? A single security breach can shatter client trust and an advisor's reputation.

Choosing the right broker-dealer is more than finding the highest paycheck. By evaluating the firms' tech infrastructures, advisors can determine which platform will best enable their growth while safeguarding their client's sensitive data.

Finsum: Select a tech-forward broker-dealer for growth and security in your advisory practice. Evaluate for scalability, innovation, and client data protection.