The Fed has begun its balance sheet reductions which those in the industry have labeled ‘quantitative tightening’. QT may be a leading cause of market volatility, as has historically been the case such as 2018. While the Fed poured trillions into the economy to mitigate the effects of the Covid-19 pandemic they are pumping the breaks as a response to rising inflation. One way to gauge the impact of these measures is surveys of consumer confidence which are at their lowest levels since the 2008 financial crisis as reported by the University of Michigan survey. Some experts think this won’t have a strong impact on the rampant inflation because many of the causes are symptoms of Covid related supply shortages. As a result investors are looking at various volatility based solutions to wade the Fed’s storm.

Finsum: The yield curve has begun to flash warning signs of a recession, but maybe the Fed can still orchestrate a soft landing.

It’s no secret bond funds have been on a track of suffering the last couple of months, but that might be turning around especially with mutual fund competitors. The counter cyclical effects of bonds and equities have broken down. In the month of May bond mutual fund outflows increased rapidly to over $90 billion, but bond ETFs saw an increase of $34 billion. Many mutual funds have been losing slowly over time to their ETF competitors. One of the complexing aspects of this relationship is that there has been a significant increase in active ETFs in the last couple of years. The Feds impact on interest rates have really shifted the traditional 60/40 portfolio because rising rates have contributed to the spiking volatility.

Finsum: The increase in active ETFs particularly for fixed income is a direct result of the macro alpha that is more prevalent than ever.

In the U.S. the predominant view on custom/direct indexing is that it serves as a vehicle to tax-loss harvest, but overseas could be shaping the future of this innovative new product. In the U.S. the tax code lends itself to these features, but Euro area tax laws vary so differently, custom indexing is being pitched more as an impact investing tool. This has real use cases specifically for targeting greenwashing. Greenwashers rig the system to benefit from favorable lending policies when they may have no business really being a green energy company. While some amount of impact investors are piggy backing on these good environmental scores to gain return, many new investors like millennials are interested in seeing their dollars actually impact environmental progress. An empowered group impact investors can eliminate ‘greenwashers’ from their custom index, which could lead to fundamental change in custom indexing.

Finsum: While the future of custom indexing products is vast ESG has some of the best potential because investors can call their bluff.