Displaying items by tag: ETFs

On January 10, the SEC approved 11 spot bitcoin ETFs. Vanguard quickly made the decision to not offer a bitcoin ETF. The decision has been met with resistance from customers. Recently, CEO Tim Buckley provided more insight into this decision, given that this has been a constant source of inquiry.

Overall, the firm doesn’t believe that bitcoin is a suitable investment option for a retirement plan, given the asset’s volatility and speculative nature. Buckley also rejects the notion that bitcoin is a 'store of value’, pointing to its severe declines in the past and correlation with equities. For example, bitcoin dropped from $69,000 to $16,000 between 2021 and 2022, while the S&P 500 was down 21% during this period from peak to trough.

Buckley added that he doesn’t believe that Vanguard will offer a bitcoin ETF until something significantly shifts in the asset class. In contrast, Vanguard only invests in asset classes with underlying cash flow. With equities, this refers to the future earnings of a company. For bonds, it can be calculated through a bond’s coupon and principal. Since bitcoin has failed to function as an effective ‘store of value’ and generates no cash flow at the moment, it remains purely a speculative asset, which makes it inconsistent with Vanguard’s principles and ethos. 

Finsum: Vanguard is not offering a bitcoin ETF, unlike many of its major competitors. CEO Tim Buckley shared why bitcoin is more of a speculative asset and unfit for long-term investing. 

Buffer ETFs have surged in popularity among financial advisors aiming to placate nervous clients while maintaining their investment positions. Their widespread adoption has led to major expansion, from less than $200 million to $36.7 billion since 2018, according to Morningstar. 

Operating on the defined outcome strategy, buffer ETFs use equity options to mirror benchmark performance while offering downside protection in exchange for an upside cap within specific 12-month life cycles, available monthly or quarterly. 

Jeff Schwartz, president at Markov Processes International, underscores the importance of comprehending the intricacies of these vehicles, given the multitude of variables involved, and that the intricacies around the buffer and cap structure are pivotal. Advisors must carefully consider market conditions when purchasing buffer ETFs at any point during their lifecycle to prevent diluting the intended benefits. 

Finsum: Timing conditions are still important when it comes to buffer ETFs despite their built in protections.

Growth has consistently outperformed value since the Great Recession. For a while, this was attributed to the Fed’s dovish policies, however this has now continued even during this period of substantially higher rates. 

There are some indications that investors should consider rebalancing between value and growth to maintain diversification, since they may be overexposed following growth’s significant outperformance over the past year. In reality, the opposite is happening as inflows are heavily skewed towards technology. 

Over the past year, net inflows into technology ETFs amounted to $18 billion which is nearly equivalent to net outflows in all other sector ETFs. This is also exacerbated by the massive size of the largest 7 technology companies which have become dominant in market-cap weighted indices. 

Another reason to consider value is that it would likely outperform in adverse market conditions given lower multiples and less froth. This could be a prudent choice for investors who are on the sidelines but wary of risks like a recession or inflation. 

Additionally, value tends to do well following periods of froth in markets. For instance, value outperformed in the years following the bursting of the dotcom bubble and the frenzy in equity markets during the pandemic. If valuations revert to the mean, then it could also set the stage for a value renaissance. During these periods, the best performing stocks tend to produce high levels of free cash flow relative to their market caps while maintaining strong balance sheets. 

Finsum: Value underperformed growth by a significant degree over the past year, continuing the prevailing trend of the last decade. Here’s why investors should consider increasing exposure to value ETFs. 

Emerging market bonds are offering a compelling opportunity for investors to lock in attractive yields while also having the potential for price appreciation. While there are many ways for investors to get exposure, the Vanguard Emerging Markets Government Bond ETF (VWOB) is one of the most liquid and diversified options. It currently pays a yield of 6.8% with an expense ratio of 0.20% and tracks the Bloomberg USD Emerging Markets Government RIC Capped Index.

Investing in emerging markets certainly means more risk due to lower credit quality, however the fundamentals are supportive of continued strong performance in 2024, while macro trends are favorable. JPMorgan estimates that emerging market economies will expand 3.9% this year, outpacing the 2.9% growth rate of developed market economies. It sees lower inflationary pressures due to weaker commodity prices which means that emerging market central banks should be able to cut rates, generating a tailwind for emerging market debt.  

In 2023, emerging market bonds were up 11%. JPMorgan is forecasting that the category should also have double-digit returns in 2024. It believes the major risk to this outlook is inflation not falling as expected which limits the ability of central banks to cut rates, especially since the market has already priced in modest easing. 

Finsum: Emerging market debt has major upside for 2024 due to attractive yields, strong fundamentals, and expectations that interest rates will be lowered. 

With the introduction of Bitcoin ETFs in January 2024, financial advisors are getting more questions from clients about whether it makes sense to consider these types of investments for their portfolios.

One topic that will undoubtedly get more attention in the press this year (2024) is the Bitcoin halving event, likely to occur in spring or early summer. Regardless of their view on this asset type, advisors should prepare themselves for client questions regarding this event.

Essentially, the Bitcoin protocol has pre-programmed events that periodically reduce by half the amount paid to the entities that verify Bitcoin transactions. Payments to these entities, called miners, are the only way new Bitcoins enter circulation. This means the rate at which new Bitcoins enter circulation is reduced. The point when the reward to miners is reduced by half is called a halving event.

The impact of a halving event on Bitcoin’s price is complex and debatable. Some believe that the reduced rate of new supply will cause the price of Bitcoin to rise. Others might make the case that factors beyond supply will have a more significant impact on the price in the future. Regardless, the performance of Bitcoin around the time of previous halving events is no guarantee of future price movements.

Finsum: Bitcoin is closing in on a halving event, and advisors should know the basics to answer client questions.