Economy
Twenty years ago, ETFs held a fraction of the assets they hold today, but the cost-efficient product wrapper would go on to disrupt the investment management industry and see trillions in assets under management. Is direct indexing the next major disruptor? According to management consulting firm Oliver Wyman, customized solutions are expected to grow to $1.5 trillion by 2025 from $350 billion in 2020. That represents a 329% increase. Since investors typically face specific risks that are unique to only them, the demand for customized investing solutions is expected to explode. Where ETFs were able to provide cost and tax benefits over mutual funds, direct indexing can go a step further by not only minimizing capital gains taxes but placing restrictions on holdings using criteria such as ESG. Previously, customization was limited to ultra-high net worth investors, but with companies such as Vanguard and Fidelity offering direct indexing solutions, more and more investors may opt for more customized solutions.
Finsum: With assets under management estimated to jump 329% by 2025, direct indexing is expected to become a major disruptor in the investment management industry.
While large-cap stocks get most of the press during earnings season, small-cap earnings releases might be a better barometer of the economy. Small-cap companies tend to be more sensitive to an economic slowdown or recession. This is due to most of their sales coming from the U.S. Large-cap companies on the other hand are typically multi-nation. Small-cap stocks also fall harder during economic downturns. In other words, if the economy was about to dive, it would be small-cap stocks that would be reporting poor earnings. But so far, small-cap company earnings are looking strong. According to an analysis from Credit Suisse, small-cap earnings projections are running 6.4% above their historical trend. This compares to 1.3% for large-cap stocks. Small-cap stocks are currently outpacing the market with the S&P 600 small-cap index outperforming the large-cap S&P 500 index.
Finsum: Since small-cap companies are typically more sensitive to economic uncertainty, strong earnings from small-cap stocks may help alleviate recessionary fears.
The U.S. is facing a significant risk of a recession with the upcoming GDP release Thursday, but experts say this is overblown. Technically a recession is determined by two straight quarters of GDP growth and negative growth in Q1 its possible the U.S. could technically hit this mark. However, the market is pricing in 1% GDP growth for Q2 currently. Additionally, economists say the signs aren’t really there. GDP slowed in Q1 mainly due to government spending, consumption and investment were both positive. Moreover, the labor market is extremely tight. Job openings, payroll growth, and unemployment all point to a robust labor market. However, there have been yield curve inversions which is a leading indicator of recessions.
Finsum: Yield curve inventions could be driven by inflation premium in the two-year treasury and not real recession risk.
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There has been a whole slew of products to increase equity in the financial world but BlackRock has introduced models that directly target female financial goals. The models are directly trying to think about female financial outcomes along three lines: life expectancy, income gap, and employment gap. Women live longer than men by about five years which affects their financial outcomes. Additionally, they earn less and are less likely to spend time in the workforce due to child labor. These outcomes mean women are systematically under-allocated to equities during critical periods of their life. The goal of these portfolios is to address the specific circumstances that women face at different periods in their life.
Finsum: This is a great insight by BR, and a more aggressive strategy might be needed for women to bridge the gap in their financial outcomes.
Alternatives have always been a decent hedge for stocks and bonds because of their low correlation in returns, but they are entering a goldilocks moment according to Cerulli Associates. According to advisors in their survey, there is a substantial increase in boosting exposure to alternatives and that will only grow over the next two years. The biggest reason advisors are sighting for shifting their client’s portfolio’s into alternatives is to reduce exposure to public markets. Advisors said they began to transition to alts during the ultra-low interest rates because a strong anchor was needed in the portfolio but was independent of interest rates. The most popular alts for advisors have been liquid alt mutual funds and ETFs which present hedge fund-esque strategies to individual investors.
Finsum: There has been a boom of options for alts in the last decade, and these options should really be considered as volatility hedges for advisors.
The ultra-low duration ETFs are gaining a lot of traction right now, mainly because there are many near retirement looking for a safe place to store their funds during this bout of volatility. Pimco Enhanced Short Maturity Active ETF, Pimcos Short Maturity Active ESG ETF, Vanguards Short-Term Corporate Bond ETF, and Short-Term Treasury ETF are among the highest rated ultra-short duration ETFs according to morningstar. Active ETFs have an advantage over indexed according to many in a macro environment like the ones we are seeing. Additionally, the most significant advantage of the ultra-short duration is they minimize interest rate risk. As the Fed tightens that raises yields and lowers prices, shorter-duration ETFs are less sensitive to this movement.
Finsum: It's hard to not see bonds at the bottom of their value currently, they are really into the buying territory.