Displaying items by tag: ETFs

Over the last couple of years, there has been an increase in the number of actively managed funds that offer exposure to more niche areas such as collateralized loan obligations, asset-backed securities, commercial mortgage-backed securities, and agency mortgage-backed securities. The latest entrant in this space is the Janus Henderson Securitized Income ETF (JHG). 

The ETF seeks to generate high income by providing exposure to “the most attractive opportunities on a risk-adjusted basis” across the market for securitized debt. The firm believes that investors can meet their income and duration goals in this sector with lower levels of credit risk. Many of these assets have less sensitivity to interest rates unlike many parts of the fixed income market. According to Paul Olmstead, the senior manager research analyst for fixed income at Morningstar Research Services, “This is a part of the market that does require active management and specialized expertise as there’s a complexity component.” 

These funds have also outperformed amid the increase in volatility over the last couple of years. Three years ago, Janus Henderson launched the Janus Henderson AAA CLO ETF (JAAA) which currently has $4.6 billion in assets. In a validation of its premise, the fund delivered a total return of 6.9% YTD and 0.5% in 2022. To compare with a benchmark, the iShares Core US Aggregate Bond ETF (AGG) has a total return of -0.8% YTD and was down 13% in 2022. 

Finsum: Many active fixed income funds are being launched with a specialized focus on a particular niche. These funds have outperformed amid the volatility in the fixed income market. 

Fixed income ETFs are in demand especially with interest rates over 5% and a cloudy economic outlook with risks like a recession and fears of another surge in inflation. Within the fixed income universe, investors can express their views through duration positioning while still taking advantage of income opportunities.

Many ETFs allow investors to focus on specific parts of the yield curve. The most well-known examples are several Treasury ETFs which range from ultra short-term to 20+ years. Lately, issuers have launched ETFs for single-year strategies for further optimization. 

However, many market participants believe that even more duration-targeting ETFs need to be launched given the disparity of views and volatility that is endemic to a higher rate and inflation environment. While there is an abundance of options in the US, there are less options in the UK and EU.

As the fixed income ETF market grows, duration-focused ETFs will continue to be a major area of growth especially as more institutional investors are embracing the asset class and driving demand for these products. Many are also of the opinion that higher rates will lead to an environment of increased volatility, shorter cycles, and faster moves. Additionally, these options will be even more imperative for allocators who are investing in shorter timeframes. 

Finsum: The fixed income ETF market is growing rapidly. Along with inflows and an increase in volatility, several ETFs have been launched that are focused on a specific part of the curve.  

First Trust Advisors is launching its 16th taxable fixed income ETF with the First Trust Core Investment Grade ETF (FTCB). The fund has an expense ratio of 0.55% and will look for the maximum possible long-term return by investing all of its funds in investment-grade securities, comprising Treasuries, TIPS, mortgage-backed securities, asset-backed securities, US corporate debt, non-US fixed income securities, municipal bonds, and CMOs. 

The fund’s portfolio managers are Jim Snyder, Jeremiah Charles, Todd Larson, Owen Aronson, Nathan Simons, and Scott Skowronski. Its core philosophy is to analyze fundamentals to identify opportunities and risks while seeking alpha through sector allocation and duration management. Decisions are made through a defined and repeatable process which includes scenario analysis and stress testing. 

They see upside for FTCB given that yields and credit spreads are at attractive levels. First Trust also believes FTCB will outperform in an economic downturn due to lower credit risk. It also believes the fund is well suited for the current market environment where risk management has been crucial, and active strategies have outperformed. According to First Trust ETF strategist Ryan Issakainen, the fund should “produce better risk-adjusted returns than passive benchmarks.”

Finsum: First Trust is launching a new active fixed income ETF, the First Trust Core Investment Grade ETF which looks to outperform passive benchmarks, maximize long-term returns, and minimize credit risk. 

With yields on the 10-year Treasury briefly above 5%, many investors are considering whether this is the time to lock in long-term Treasury ETF exposure. Entering 2023, this was the consensus trade as many expected a slowing economy would erode inflationary pressures and compel the Fed to start cutting rates. Instead, long-duration Treasuries have seen another year of losses as the economy and inflation remained more durable than expected, and the Fed has continued to hike rates.

YTD, the iShares Treasury Bond 20+ Yr ETF (TLT) is down 13%, while the short-duration focused iShares Treasury Bond 0-1 Yr ETF (SGOV) is slightly up on the year. However, the case for long-duration Treasuries is even stronger than at the start of the year, and investors should consider taking advantage of the weakness. 

The Federal Reserve has been increasingly dovish in the face of soft economic data and has already signaled that it will hold off on hikes at its next meeting. There is no longer inversion between the 2Y and 10Y which has generally been a reliable indicator of a recession. Weakness in regional banks and a spike in auto loan delinquencies also are indicative of the economy weakening which would also lead to more dovish policy from the Fed and relief for long-duration Treasury ETFs.

Finsum: Fixed income inflows have been strong all year despite considerable volatility and uncertainty about the economy and Fed.Long-duration Treasuries have floundered so far this year, but here are some reasons why investors should consider buying the dip.

Inflows into fixed income ETFs have continued despite major losses in bonds over the last couple of months. Further, there is no clear indication when the tide will turn given expectations of high supply in the coming months and ambiguity about the economy, inflation, and Fed. 

The most liquid and popular bond ETF, the iShares 20+ Treasury ETF (TLT) has had $17.9 billion inflows so far this year. Assets under management have swelled to $41 billion as well. The biggest driver of flows is due to institutions, pension funds, and family offices that have a mandate regarding fixed income exposure.

Another factor driving demand is that yields are at their highest level in 16 years due to the Fed’s rate hikes. A longer-term trend that supports fixed income flows is that many investors and wealth managers are increasingly favoring ETFs over mutual funds due to lower costs and better liquidity. 

ETFs could also be better suited for volatile environments given that they can be used to harvest tax losses. Additionally intraday liquidity means that exposures can be shifted more easily to achieve precise targeting. 

Finsum: Fixed income ETFs continue to experience healthy flows despite significant volatility.