Displaying items by tag: active etfs

Blackrock’s Q2 earnings report gave some insights on the performance of its various funds in addition to commentary from its management team. Overall, the asset manager exceeded analysts’ consensus expectations with $9.28 in earnings per share vs $8.45. Compared to last year’s Q2, net income was up 25% while revenue was down 1%. Total assets under management climbed to $9.4 trillion.

However, the company did miss analysts’ estimates when it came to inflows into its equity and fixed income funds at $57 billion vs expectations of $81 billion. Active funds were particularly weak with $9.7 billion of outflows from active equity and $3.7 billion from active fixed income.

These disappointments have weighed on Blackrock’s stock price which has underperformed the S&P 500 YTD. Yet, the company remains confident that future growth will come from active fixed income. According to Blackrock President Rob Kaptio, “There is finally income to be earned in the fixed-income market.” He sees higher yields as a “once-in-a-generation opportunity” and that are supportive of inflows into its lineup of active fixed income products. 

Finsum: In Q2, Blackrock saw negative inflows into active fixed income and equity funds. Yet, the company continues to see these products as key to its long-term growth.

In an article for InvestmentWeek, Jeffrey A. Johnson, the head of Fixed Income at Vanguard,  discusses why there is opportunity for investors in active fixed income funds. He sees attractive valuations coupled with elevated yields. However, he warns that more volatility is likely given that central banks aren’t yet finished raising rates. 

According to Johnson, periods of volatility are when active fixed income really shines. Further, he believes investors can increase their odds of success with active investing by selecting funds with qualified and capable management teams in addition to low costs. 

Over the long-term, most active funds fail to beat their benchmarks. The story isn’t so simple in fixed income given that active managers can take advantage of different durations and credit quality that aren’t available to passive funds. 

Given the challenges of active management, Vanguard recommends a blend of active and passive funds. Although, it favors active management during periods of volatility and uncertainty. In contrast, passive funds offer predictability and lower costs, while active funds offer a higher degree of risk and reward. 

Finsum: According to Vanguard, the outlook for active fixed income funds is improving. The asset class tends to outperform during periods of volatility and economic and monetary uncertainty. 

In an article for Dividend.com, Aaron Levitt discussed why active fixed income funds have outperformed passive fixed income funds. 

The majority of active equity funds underperform their industry benchmarks. Therefore, it’s not surprising that these have dominated in terms of inflows. 

But, it’s a different story in fixed income. Recent research from JPMorgan shows that active fixed income has outperformed passive. Some of the reasons for this is that passive funds are overweight with firms and entities that have the most debt. 

Active funds have wider latitude and can find opportunities in various parts of the market. They also are able to take positions in different parts of the capital structure. The absence of passive funds in these spaces also leads to more favorable valuations. Many active funds are also able to take advantage of foreign debt and high-yield fixed income. 

As a result, inflows into active fixed income have been growing at a faster pace than inflows into passive fixed income. More inflows into active fixed income should also lead to increased liquidity in many parts of the fixed income space.

Overall, active funds have failed to outperform passive ones in the equity space but have done so in fixed income.

Finsum: Recent research shows that active fixed income has outperformed passive fixed income. This is contrary to many investors’ expectations given the outperformance of passive equity funds vs active equity funds.

For VettaFi’s ETFTrends Channel, Nick Peters-Golden discusses why active fixed income is the best way for investors to take advantage of higher yields. Investors should be discriminating when it comes to selecting fixed income instruments due to challenges like the inverted yield curve and the lack of real yields in many areas.

The overall climate is becoming more favorable to fixed income with the Fed finished or in the final innings of its hiking cycle, while inflation continues to moderate. However, investors should favor certain categories.

The best opportunities from a risk and reward perspective are in corporate credit and global, high-yield. Active fixed income funds offer investors the opportunity to increase exposure to these parts of the market, while avoiding less attractive parts.

According to Peters-Golden, active fixed income allows a bottom-up approach to investing which will outperform index-based funds. And, this judiciousness is more necessary in the current environment given the wide dispersion in quality and yields. 

For instance, active corporate credit funds are able to outperform, because they are allocating to firms with strong balance sheets, while corporate credit index funds are taking a one size fits all approach. 

Finsum: Trends are improving for bonds, but investors need to remain selective given the unique nature of the cycle. Active fixed income allows increased allocation to areas with better fundamentals and avoids ones where the risk-reward is not attractive.

In a recent Bloomberg article, Katherine Greenfield covered strength in high-yield fixed income ETFs on the back of the equity rally and growing optimism that the US will evade a recession, while inflation gradually decelerates. Initially, strength in equities was confined to the tech sector but has now broadened out to the rest of the market.

Another indication that the odds of a soft landing continue to move higher is that there was more than $2 billion of inflows, last week, into the iShares iBoxx High Yield Corporate Bond ETF which has $17 billion in assets. This was the largest inflow into any fixed income ETF over that period and the most since November 2020.

Strength in high-yield fixed income is counterintuitive due to several downgrades and stresses in areas like regional banks and commercial real estate. However, investors seem to be looking past these issues and focusing on improvements on the economic and inflation front. 

Overall, high-yield fixed income is up about 4% YTD, following a 11% drop in 2022. Investors also seem eager to lock in high rates as futures markets indicate that the Fed is going to pause it's hiking campaign, while many expect it to start cutting rates by the end of the year.

Finsum: High-yield fixed income ETFs are seeing major inflows despite an assortment of risks. Many investors believe these risks are priced in, while recent news on the economy and inflation have been bullish for the asset class.