Allworth Financial manages $19 billion in client assets. Recently, Allworth CIO Andy Stout shared the firm’s approach to managing model portfolios for clients. The firm has a scorecard in which it quantitatively evaluates all investable mutual funds and ETFs. It follows up by having conversations with managers of funds with high marks to see if their process is ‘repeatable’ prior to investing.

Allworth’s core portfolio is a 60/40 mix between equities and bonds, respectively. The equities side is composed of 48% US stocks and 12% international. The fixed income side is a combination of short-term fixed income funds, investment grade, total return funds, and a handful of active funds.

Allworth believes in spreading allocations between multiple asset managers. For instance in its core portfolio, they use SPDR, Vanguard, Blackrock, and JPMorgan. When it comes to fund selection, the firm looks for securities that are equipped to navigate the entire business cycle. Stout also noted that consistency is valued more since success is more about ‘avoiding strikeouts’ than hitting a home run. In terms of risks, he sees recession risk as remaining elevated and thus favors more defensive sectors and investments.   

Finsum: Allworth Financial CIO Andy Stout shared the firm’s approach to model portfolios, and what opportunities and risks he sees at the moment. 

The SEC has approved the first set of bitcoin ETFs this week following a long review process. Multiple ETFs began trading on Thursday to prevent any firm from having a first-mover advantage. So far, the iShares Bitcoin Trust is the leader in terms of inflows followed by the Bitwise bitcoin ETF and the Fidelity Advantage Bitcoin ETF.

This may adversely affect demand for gold as investors will have another option to diversify portfolios. According to Joy Yang, the Global Head of Index Product Management at MarketVector Indexes, these new ETFs will likely result in gold remaining range bound around current prices due to less interest from investors. She believes it could be similar to 2021 when gold underperformed during the bull market in cryptocurrencies.

Still, she doesn’t see gold falling below $2,000 in 2024 and is bullish on it in the longer-term due to geopolitical risks and economic and financial uncertainty. And she acknowledges that gold has more upside if the Fed is forced to cut more aggressively than currently anticipated. 

Overall, gold and bitcoin have many similarities despite one being less than 2 decades old, while the other has been around since the dawn of humanity. And both are ‘stores of value’ relative to currencies and offer protection against inflation. 

Finsum: Approval of multiple bitcoin ETFs is expected in the coming weeks. This is likely to have a negative impact on gold demand as investors will have another option to diversify their portfolios.

2023 was an unprecedented year for interest rate volatility. The yield on the 10-year reached a low of 3.3% in April following the regional banking crisis, peaked at 5% in October, and finished the year at 3.8% following a series of supportive inflation data.

Given that inflation has declined to 3.1% which is nearly 70% less than the highest levels of 2021, the odds of a soft landing continue to rise. Currently, the Fed’s plan is to loosen financial conditions by lowering the Fed funds rate, while it continues to shrink its balance sheet.

Part of the plan should also be to reduce bond market volatility especially since it has doubled over the past 2 years and remains elevated relative to norms. In some respects, elevated bond market volatility is a consequence of the Fed’s battle against inflation. Now, it must also effectively deal with this issue before it becomes more substantial. 

Therefore, it’s likely that the Fed will cut back on its quantitative tightening program in which $95 billion worth of maturing bonds are not reinvested. Already, these efforts have succeeded in shrinking the Fed’s balance sheet by 15%. Another reason that curbing bond market volatility is necessary is that the Treasury will be auctioning off large amounts of notes and bills in the coming months. 

Finsum: The Federal Reserve has made significant strides in turning inflation lower. Now, it must take steps to reduce bond market volatility.

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.