The Energy Select SPDR ETF (XLE) is up 14% YTD, which is the second-best performance among sectors. This follows a year of underperformance in 2023 due to concerns of a recession impacting energy demand, while strong US production offsets the impacts of OPEC cuts. Last month, OPEC announced that production cuts of 2.2 million barrels per day would continue in the second quarter.

This year, oil prices have risen due to increased tensions in the Middle East. Additionally, recent economic data has clarified that the US economy is not near a recession, and there are some indications of a pick-up in economic growth. The near-term macro picture looks bullish for energy stocks given increased demand, tighter supply, and intensifying geopolitical tensions. On the supply side, OPEC has demonstrated discipline in terms of members abiding by agreed-upon production cuts, and US production is expected to not increase further.

Given valuation concerns about many parts of the market, energy stocks are also cheap, trading at 13 times expected earnings vs. 21 for the S&P 500. XLE also pays a 3% yield, which is more than double the S&P 500’s yield of 1.4%. Further, historical research shows that energy stocks have posted the best performance in high-rate environments, which is likely to persist for longer given recent economic data. 

Finsum: Energy stocks have had a strong start to 2024. Recent economic data is supportive of increased demand, while the supply side is being impacted by OPEC cuts and heightened geopolitical tensions. 

Active fixed income demand is surging. The secular drivers are increased comfort and adoption by advisors and investors with the category, in addition to the conversion of actively managed fixed income mutual funds into ETFs. From a cyclical perspective, the current environment, which has attractive yields but considerable uncertainty about the Fed and economy, also favors active fixed income strategies.

Despite its growth, active fixed income makes up less than 4% of allocations, revealing that there is more upside. As long as the Fed remains in a wait-and-see mode, active fixed income is likely to remain in favor. And this period of uncertainty has certainly been extended following the recent string of robust inflation and labor data. 

This type of rate environment requires a more flexible and agile approach, which is better suited for active fixed income. According to Bryon Lake, JPMorgan Asset Management Global Head of ETF Solutions, “To me, it’s all about active fixed income. With what is happening in the rate space, investors are all rethinking their fixed income allocations as we speak. We want to talk about active fixed income … where investors can dial in the exposures that they’re looking to get in the ETF wrapper.”

Finsum: Current uncertainty about the timing and number of Fed rate cuts in 2024 has been a major contributor to the growth of active fixed income. And this uncertainty has increased following recent economic data. 

Stocks and bonds have been weaker since Wednesday’s stronger than expected inflation report. While some on Wall Street are now questioning whether the Fed will be able to cut rates at all, Rick Rieder, Blackrock’s head of fixed income, continues to see rate cuts later in the year.

He notes that Thursday’s PPI report was softer than expected and an indication that most inflation is contained in the services sector. He doesn’t believe that monetary policy could have too much impact on this type of inflation and that it would have damaging effects on other parts of the economy. Overall, he sees recent data consistent with core PCE at 2.6-2.7%.

He believes the current data justifies between one and two rate cuts before year-end. However, he believes that the data could still evolve in a way that justifies more. With rates above 5% and core PCE below 3%, monetary policy is very restrictive, so he believes the Fed will lower rates regardless.

In terms of fixed income, Rieder is bullish on short-duration notes, as investors can get yields between 6% and 7%. He sees the 10-year Treasury yield modestly declining into year-end due to softer economic data and the Fed cutting rates. However, longer-term, he believes that it is range-bound between 4% and 5%.

Finsum: Many on Wall Street are starting to turn more pessimistic about the Fed’s ability to cut rates given recent inflation data. Blackrock’s Rick Rieder still sees cuts later in the year, even if the data doesn’t significantly improve.

Over the last decade, private credit has boomed, growing from $435 billion to $1.7 trillion. One consequence of this has been a growing marketplace for private credit secondaries. Currently, the private credit secondary market is estimated to be worth $30 billion, but it’s forecast to exceed $50 billion by 2027.

The secondary market is where private credit investors can sell their stake early. It’s natural that as allocations to private credit have increased, there is now a need for liquidity, which is provided through the secondary market. Most of it is driven by investors looking to rebalance their holdings. Another benefit is that it can potentially provide diversification to private credit investors. Some managers are now fundraising for funds dedicated to the private credit secondary market, such as Apollo Global Management and Pantheon.

There is also an analogue between the private equity secondary market and the private credit secondary market. Although the private equity secondary market is more mature and larger at $100 billion, with many more established funds in the space. According to Craig Bergstrom, managing partner and CIO of Corbin Capital Partners, “I don't think private credit secondaries will ever get to be as big as private equity secondaries. And I don't think they'll even get to be as large as private credit is in proportion to private equity because the duration is shorter.”

Finsum: A consequence of the boom in private credit is a growing and active market for secondaries. It’s evolving similarly to the secondary market in private equity and is forecast to exceed $50 billion by 2027.

In 2001, Vanguard pioneered a novel method for integrating ETFs as a share class within existing mutual funds, propelling the company to prominence in the ETF market. However, this competitive edge dissipated when the patent lapsed in May 2023, prompting a frenzied quest within the fund industry to secure regulatory approval for Vanguard’s ETF share class innovation. 

Noteworthy industry players, including Fidelity, Dimensional Fund Advisors, and Morgan Stanley, have vigorously advocated their positions to the Securities and Exchange Commission (SEC), joined by a myriad of smaller asset managers, propelled by factors such as immediate scalability, established track records, and structurally superior offerings.

Despite prior reservations expressed by the SEC regarding ETFs constructed as a share class of multi-class funds, the industry's push for ETF rule revisions has gathered steam, prompting the active involvement of leading stock exchanges. Analysts anticipate substantial market shifts with any SEC endorsement allowing fund companies to adopt Vanguard's ETF structure.

Finsum: The landscape of for ETFs is changing quickly and the race to the bottom, but regulation will be critical.