Displaying items by tag: ETFs

2023 saw many twists and turns in financial markets. Yet, one enduring trend was the growth of active and fixed income ETFs as measured by inflows and new ETF launches. Andres Rincon, the Head of ETF Sales and Strategy at TD Securities, shares why this was the case and what’s next for 2024.

A major factor is that mutual funds had net outflows, while ETFs had nearly an equivalent amount of inflows. This is an indication of a secular shift as investors and institutions increasingly favor ETFs due to more liquidity and transparency. In response, many asset managers are now converting fixed income mutual funds into active ETFs or offer dual versions.

Fixed income ETFs also benefited from yields being at their highest level in decades in addition to an uncertain economic outlook. Despite the rally in fixed income in the last couple of months of 2023, Rincon notes that investors had been positioning themselves for a downturn in the economy and pivot in Fed policy starting early in the year. 

Flows into active fixed income ETFs have also been strong, given that fixed income is more complex than equities. This is despite these ETFs typically having higher fees. Yet, active managers are able to take advantage of inefficiencies that are unavailable to passive funds. And, active is a particularly good fit for the current moment when there is indecision about the timing and extent of the Fed’s next move.

Finsum: TD’s Andres Rincon discusses what drove the surge of inflows into fixed income and active ETFs last year. And, why these trends should continue in 2024. 

There’s a major drawback to today’s hyper-connected world where investors are constantly receiving financial advice that is mostly short-term and doesn’t necessarily have the investors’ best interests in mind. Contrast that approach to a long-term, fundamental based approach that is based on timeless principles rather than impulsive thinking.

Recently, there has been a narrative that individuals should be buying individual bonds. Adam Abbas, a portfolio manager at Oakmark Funds, pushed back against this notion and made the case for why most investors are better off with mutual funds and ETFs. 

He acknowledges that bonds look very appealing given where rates are relative to historic levels and that default rates for high-quality securities are likely to remain low. However, the risk climbs when investors start ‘reaching for yield’ which tends to happen with individual investors. Therefore, some sort of comprehensive credit analysis is required from a bottom-up perspective. 

Further, most individual investors will not be able to sufficiently diversify their portfolios. This means that their portfolios would be damaged by a corporate bond default. In addition to understanding companies, investors also need to have a grasp on the macro picture as factors like inflation or rate policy can also impact returns. 

Given these difficulties, most investors are better off choosing an astute active manager to invest in bonds as they will conduct proper due diligence and ensure that portfolios are sufficiently diversified. 

Finsum: There’s a trend of individual investors buying individual bonds. Oakmark’s Adam Abbas pushes back against this and makes the case for why most investors are better off with a mutual fund or ETF. 

According to a survey conducted of attendees at the VettaFi Income Strategy Symposium, 60% are looking to add fixed income ETF exposure from cash and/or equities. This aligns with the view of fund managers on the panel who also believe that the Federal Reserve is near the end of its hiking cycle. 

John Croke, Vanguard’s head of active fixed income product strategy, commented that this is a good time to invest in fixed income. He sees the economy heading for a mild recession in the middle of the year despite the better than expected, recent Q3 GDP figures. He agreed with attendees that the hiking cycle is in its final innings and believes that the Fed funds rate will be closer to 4% rather than 5%. 

For investors looking to up their fixed income exposure, he recommends an ETF such as the Vanguard Total Bond Market ETF (BND). BND offers exposure to a diversified basket of investment-grade, US debt. He also recommends the Vanguard Ultra-Short Bond ETF (VUSB) for investors looking to exchange cash for bonds. VUSB is composed of a diversified basket of high-quality and medium-quality bonds with an average maturity between 0 and 2 years. 

Finsum: According to a survey of attendees at the VettaFi Strategic Income Symposium, 60% of advisors are looking to increase their fixed income ETF allocation in 2024. 

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.

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.