Displaying items by tag: active etfs

In an article for ETFTrends, Todd Rosenbluth discussed how US insurance companies are aggressively investing in fixed income ETFs. Last year, the industry invested a total of $37 billion in ETFs. This is a small portion of the overall ETF market and the $7.9 trillion that is cumulatively managed by US insurance companies. 

However, insurance companies are some of the largest holders of fixed income ETFs especially for corporate bonds according to a report from S&P Dow Jones Indices. S&P Dow Jones believes that insurers are gravitating to these products because of increased liquidity and higher yields. Additionally, these ETFs functioned well over the last couple of years despite periods of considerable market stress. 

In terms of ownership, insurance companies own 14% of the iShares iBoxx $ Investment Grade Corporate Bond ETF at year-end 2022. The average duration is 8 years with a split of A- and BBB-rated bonds. 

2 more popular bond ETFs are the iShares 1-5 Year Investment Grade Corporate Bond ETF andthe iShares 10+ Year Investment Grade Corporate Bond ETF (IGLB). Both invest in similar products but with different durations. Each has 11% and 7% ownership by the insurance industry, respectively. 

Finsum: Fixed income ETFs are becoming increasingly accepted by institutional investors. Research from S&P dow Jones shows that insurance companies are some of the largest holders.

2023 has been quite different compared to 2022 especially from a financial markets perspective. Due to raging inflation and a hawkish Fed, 2022 saw weakness in both stocks and bonds. In contrast, both asset classes have delivered positive returns in 2023 YTD despite significant and continued headwinds.

This is particularly the case for active fixed income. In an article for the Financial Times, Madison Darbyshire and Harriet Agnew highlight how large asset managers have been increasing allocations to the category as they look to lock in higher rates with the Fed in the final innings of its rate hikes. Analysts are noting demand from institutional and retail investors, across the active fixed income spectrum. 

In 2022, $332 billion moved out of the category, but 2023 has already seen inflows of $100 billion in the first third of the year. This trend is expected to only strengthen with active fixed income ETFs expected to continue taking a larger share of the fixed income and ETF universes. According to State Street CEO Yie-Hsin Hung, "It feels like the beginning stages of what happened in equities.”

Finsum: After a poor 2022, inflows into active fixed income are sharply higher as they look to lock in higher rates given the end of the Fed’s tightening and increasing odds of a recession.

In an article for ETF.com by Michelle Lodge, she examines whether success in portfolio management is a matter of skill or luck. According to survey results from S&P Dow Jones, there is little connection between good choices made by a manager and portfolio performance. 

According to Craig Lazarra, the Director of Index Investment Strategy at S&P Dow Jones, “Our report for year-end 2022 finds little evidence of persistent active management success, despite considering a variety of metrics and lookback periods.” 

According to the research, investors are better off with low-cost, diversified ETFs. Additionally, success in terms of picking stocks and ETFs is not repeatable. Additionally even in a poor year for passive funds, 51% of active managers still underperformed their benchmarks in 2022. 

Another piece of evidence cited is that managers who outperformed in the first half of the last decade, failed to outperform in the second-half of the decade. The same dynamic appears with active fixed income managers with no indication that success in one year is likely to repeat in subsequent years. 

Finsum: Research shows that active fixed income and equity outperformance is unlikely to repeat in following years.  

In an article for VettaFi’s Modern Alpha channel, Nick Peters-Golden discussed the outperformance of active fixed income funds in the first quarter of 2023. The entire sector has had strong performance since the end of last year primarily due to decelerating inflation, rising recession odds, and the banking crisis. 

As a result, fixed income ETFs saw $52 billion of inflows in the first quarter which is more than 60% of the total $80 billion in ETF inflows. Within the fixed income ETF universe, active bond funds have outperformed as they have been able to take advantage of market volatility and concentrate on shorter-term maturities which have outperformed. 

One example is the Kingsbarn Tactical Bond ETF which invests across the credit and duration spectrum in global bond ETFs and Treasuries. This is an outperformer among active bond funds with a 6.2% return YTD. Another outperformer is the First Trust TCW Securitized Plus ETF which invests primarily in mortgage-backed securities that are comprised of private securities and government-sponsored debt. This fund is up 5.2% YTD. 

Finsum: Active fixed income funds have outperformed in 2023 and been the recipient of the bulk of ETF inflows.

In a recent Bloomberg article, Katherine Greenfield discussed the growing popularity of triple-leveraged bond ETFs. It’s somewhat surprising given that the bond market is coming off its most volatile year in 2022 in decades given the challenges posed by rising rates and sky-high inflation. 

Further, bond investors tend to be more conservative and favor the asset class, because it is less volatile than equities. Similarly, there has been an uptick on call and put buying on fixed income ETFs as well. To compare, there were 827,000 contracts traded on the iShares 20+Year Treasury Bond ETF in 2013, while there have been more than 2.2 million contracts traded on the same ETF this year.  

Overall, there are 15 leveraged fixed income ETFs, listed in the US. Total assets have climbed to $3.5 billion with the largest being the 20-Year Treasury Bull 3x which provides exposure to longer-term Treasuries and uses derivatives to track its underlying index. So far, this ETF has already seen $720 million in inflows, nearly eclipsing last year’s total of $783 million. According to Greenfield, the inflows into leveraged fixed income ETFs are likely due to retail traders, while the spike in options activity can be attributed to institutional investors.

Finsum: Leveraged fixed income ETFs are experiencing massive inflows, while options activity on fixed income ETFs is also soaring. .