The highly anticipated launch of Bitcoin exchange-traded funds (ETFs) in early January was met with a wave of excitement, with investors eager to gain exposure to this burgeoning asset class. However, their enthusiasm was quickly dampened as Bitcoin's price took a hit, dropping nearly 13% in the following days.

Despite the rocky start, a sense of cautious optimism has returned to the ETF space. Bitcoin's recent price surge has reignited investor interest, fueling a significant increase in inflows into these funds. CoinShares, a leading crypto asset management firm, reported (02/19/24) a record-breaking $2.4 billion flowing into Bitcoin ETFs last week, representing a remarkable turnaround.

This renewed demand presents a unique challenge for financial advisors. With clients increasingly inquiring about the potential role of Bitcoin ETFs in their portfolios, advisors need to navigate the complex landscape of this new asset class. While these ETFs offer a convenient way to gain exposure to Bitcoin, their inherent volatility demands careful consideration. Unlike traditional investment options, Bitcoin exhibits significant price fluctuations, making it a riskier proposition for many investors.

Finsum: Bitcoin ETFs got off to a rocky start in January, but flows into these funds are recovering remarkably as the cryptocurrency’s price soars.

Burton Malkiel is one of the pioneers of passive investing with his classic, “A Random Walk Down Wall Street”, introducing the concept to millions of people. In his current role as CIO of Wealthfront, he has spoken about the power of direct indexing to enhance after-tax returns. In a recent blog post, he remarked that tax-loss harvesting is “the only reliable way for investors to outperform the market.” 

With direct indexing, portfolios are regularly scanned for tax-loss harvesting opportunities. This enables investors to capture the advantages of passive investing while still availing themselves of the tax loss benefits of a more active approach. 

Malkiel notes that passive strategies outperform active 90% of the time, and active returns are even worse after taking taxes into consideration. He sees direct indexing working well, especially for investors who are periodically putting money to work in their accounts and during periods of heightened volatility. 

In terms of other tax considerations, Malkiel believes that Roth IRAs are the best investment vehicles for the majority of investors. He recommends dollar-cost averaging when investors are in the ‘accumulation’ phase but not necessarily for those drawing down funds. And he reaffirms that keeping costs low is one of the keys to long-term investing success. 

Finsum: Burton Malkiel, the author of “Random Walk Down Wall Street” is an advocate for direct indexing given its power to boost after-tax returns.

Morningstar recently completed its annual review of the US Model Portfolio Landscape. It noted that assets under management (AUM) in model portfolios reached $424 billion, a nearly 50% increase over the last 2 years. 

Some of the drivers of growth include enabling an easier investment process, providing access to institutional investors’ insights, and increased fund selection. It allows advisors to outsource elements of the investment management process to the extent that they feel comfortable. The net benefit is that it allows for more time to be spent on client engagement, financial planning, and growing the business. 

Another factor is lower costs. On average, model portfolios are 19 basis points cheaper than comparable mutual funds. In terms of market share, Blackrock and Capital Group are the leaders with $84 billion and $75 billion, respectively representing 37.5% of total AUM. Launching of new model portfolios has slowed as there is saturation in many areas like income, ESG, passive, or active. Instead, new launches are predicted to focus on greater customization such as optimizing tax efficiency.

Finsum: Model portfolio AUM has risen by nearly 50% over the last two years. Reasons for growth include easing the investment process management process for advisors, lower costs, and a greater variety of options.

Annuity sales reached a record $385 billion last year, up 23% from the previous year, driven by a growing demand for retirement income security amidst rising interest rates. To meet this demand, life insurers are investing in corporate debt and commercial mortgage bonds to fund these products.

Despite recent declines in bond yields, annuity sales are expected to remain strong due to demographic factors and higher interest rates, maintaining tight valuations in the investment-grade corporate bond market. Fixed-rate deferred annuities, especially popular among those nearing retirement, saw their best-ever quarterly sales of $58.5 billion in the fourth quarter of last year, indicating sustained demand among individuals approaching retirement age.

Looking ahead, annuity sales are likely to continue robustly, supporting corporate debt markets and providing stability to investment-grade corporate bonds and commercial mortgage-backed securities. This trend underscores the enduring appeal of annuities as a favored choice for individuals seeking guaranteed income in retirement and highlights their role in shaping the landscape of financial markets.

Finsum: Expect annuities products to continue to have very high demand for the foreseeable future given the aging U.S. population, and this shows fixed income demand will also increase as a result. 

U.S. House of Representatives push back on one of President Biden’s most recent energy initiatives, pausing approvals for liquified-natural-gas exports. The GOPs bill passed on a measure of 224 to 200 in the House and a similar bill making its way to the Senate. 

Biden’s pause on LNG-exports sent shockwaves through the energy markets last month as prices plummeted to the lowest point in nearly four years. 

The halt of LNG exports was praised by climate activists and was seen as a pivotal step by the current administration in dealing with one of the more pressing issues of our times, but conservatives fear this initiative puts a restriction the U.S. ability to generate jobs in this area. Moreover, countries like Russia could step in to fill the void in production. It was only a year ago Biden was pleading with European countries to decrease their reliance on Russian natural gas production. 

The final piece of this puzzle is the legislation would limit the ability of the Department of Energy to regulate and control LNG, and Democrats have made the plea that if this bill was enacted it would increase prices for consumers.

Finsum: Declining natural gas prices could also be affected by this year’s historically warmer temperatures mitigating the need for typical winter consumption.