Economy
While ESG investing is still in favor with pension funds, fears over a recession are leading to the closure of several ESG ETFs. According to Bloomberg, ESG ETF closures account for 15% of all U.S. ETF closures this year. While that may not seem like a lot, ESG ETFs only represented 4% of all U.S. ETFs at the beginning of the year. The most recent closure was the Ark Transparency ETF (CTRU), managed by Cathie Wood. That closure brought the total to seven this year. During the bull market, ESG ETFs saw plenty of inflows as investors sought funds that aligned with a greener future. However, the market downturn and fears of a potential recession have put ESG on the back burner. Investors are now more concerned with portfolio protection than sustainable investing.
Finsum: While ESG investing was quite popular during the bull market, the recent downturn and fears over a recession have led to the closure of several ESG ETFs.
It appears the SEC may be bringing more enforcement cases against wealth managers in regards to their compliance with Regulation Best Interest, the two-year-old rule that establishes a "best interest" standard of conduct for broker-dealers and associated persons. Enforcement Director Gurbir Grewal told lawmakers at a hearing on July 19th that investigators are now reviewing referrals from the regulator’s examinations of advisory firms. Wall Street’s top regulator made firms’ compliance with the rule a formal priority for this year. The Enforcement Division has requested 125 additional employee positions next year. During the hearing, which occurred a month after the SEC’s first case under Reg BI, Congresswomen Maxine Waters, who is chairwoman of the House Financial Services Committee, pressed Grewal on how brokerages have changed their practices under the rule and stated that she “can’t imagine only one firm or a handful of brokers” is violating the rule.
Finsum: Based on testimony from a recent congressional hearing, the SEC is reviewing referrals from the regulator’s examinations of advisory firms which could lead to more Reg BI enforcement cases.
Due to a lack of investment products that consider factors unique to women, Blackrock is looking to fill the void by creating its first model portfolios for women. The three factors that are specifically unique to women are life expectancy, income gaps, and employment gaps. Most investment products are missing these three-factor inputs and as a result, negatively impact women’s long-term investing success. The firm believes women may be under-allocated to equities at critical points in their lives when these three factors aren’t reflected in their investment choices. The investing giant is leveraging its proprietary LifePath® lifecycle investing framework and adjusting standard investment considerations to include the three additional inputs. The model portfolios include investment mixes for women across different life stages and could ultimately serve as the core of a woman’s portfolio.
Finsum: Blackrock believes current investment products don’t take into account three factors specific to women, which led the firm to create its first model portfolios tailored for women.
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Q1 GDP came in negative for 2022 which means all it takes is a subsequent negative output report for the U.S. to slip into a recession. Goldman Sach’s Chief Economist David Mericle says this slowdown is all but inevitable, however it comes with a small advantage for markets. That is if the U.S. does slip into a recession or advanced slowdown, the Fed has no option but to stall rate hikes. All of this culminates in Goldman predicting a 75 bps hike in July, 50 bps in September, and slowing to just a quarter point in the final two meetings. Mericle is calling for a 30% chance of a recession with ultra-low 1.5% growth in the upcoming year. However, this would be quite a swing from the jobs report we have seen in recent months with strong numbers and positive growth.
Finsum: Most of Q1 GDP growth slowing was because of government spending, and consumer activity was remarkably robust; people may be too bearish about the economy.
With fixed-income securities starting to look attractive again, fixed-income ETFs saw the most inflows during the week ending July 15th. Over $7.6 billion flowed into ETFs last week with over 90% ($6.9 billion) flowing into U.S. fixed income ETFs. The iShares U.S. Treasury Bond ETF (GOVT) saw the highest weekly inflows with $2.4 billion. It appears investors are adding fixed income back to their portfolios as yields have risen above 3%. The June Consumer Price Index came at a scorching hot 9.1%, which means the Fed is expected to increase rates another 75 or even 100 basis points in their next meeting. This could drive bond yields even higher. That makes bonds more attractive to investors and money managers due to higher yields and lower prices which should result in more flows into fixed-income ETFs.
Finsum: Higher inflation combined with rate hikes are making fixed-income securities more attractive to investors leading resulting in fixed-income ETFs dominating fund flows.
Even with the market up for a third straight day, don’t expect volatility to disappear anytime soon. That is according to two market strategists. In a recent media appearance, Citi's Institutional Clients Group chairman Leon Kalvaria warned that more market volatility is to be expected until inflation and rate hikes stabilize. In a separate media appearance, BlackRock Americas iShares Investment Strategy Head Gargi Chaudhuri also says he expects volatility to continue on the backdrop of higher inflation and increased politicization. Recent gains aside, with rates expected to continue to move higher and consumers feeling the crunch of higher energy and food prices, market volatility is likely here to stay.
Finsum: With more expected rate hikes to combat persistent inflation, don’t expect market volatility to disappear anytime soon.