Economy
Very few investment trends have caught on as rapidly as model portfolios which have seen widespread adoption, but this could be lowering asset flexibility. Model portfolios seek a variety of metrics for assets to be added to the fund. Assets may be excluded for categorical or qualifying reasons which can lead to a lack of adoption and lower returns. The selection bias in models leaves meat on the bone for investors and can keep them from getting exposure to products like covered calls or other investments.
Finsum: Model portfolios have their place, but they could create an inefficiency where some products are given their proper value.
Altruist is launching a new direct indexing product at a low $2000 minimum coming at the end of May. Altruist is using fractional shares in order to be at the lower bound of direct indexing minimums. With direct indexing investors own the underlying asset, which comes with tax alpha but usually at a very high minimum footprint. The index will track a cap-weighted 500 stocks similar to the S&P. However, the penalty for this ultra-low minimum is that investors won’t have the ability to customize their final product, which greatly affects the value of the DI offers. They will allow value-based screens later thin the year according to management.
Finsum: Direct indexing without dropping for tax alpha is a bit of a puzzle because it’s hard to see the advantage over ETFs.
There has been a mass exodus in the corporate bond market which is making fixed-income funds as attractive as they have been in a while. Outflows started 21 weeks ago and are hitting $28 billion according to Refinitiv Lipper. With investors fleeing this has created even more negative returns on top of inflation and interest rate pressure. Investors willing to hold bonds to completion, particularly in value sectors like banking are getting them at an ultra bargain. One reason we are seeing investors flee corporate bonds is yields have been climbing faster than treasuries but many see interest rate risk already priced in which could be enough to turn around the investment-grade bond market.
Finsum: Value sector bond ETFs could be a smart play, with commodities and financials being major players.
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Hedge funds have made it clear they are gonna short those not meeting ESG criteria, but the broader market is still willing to short Tesla because the bottom line means more. Despite all of its sustainability credentials investors are making bets against Tesla. Bill Gates took a big short position apparently, and Tesla CEO Elon Musk chirped back on Twitter, saying it's incompatible with their environmental concerns. All of this happens as Musk secured $44 billion to buy Twitter Inc. This isn't the first time Tesla is no stranger to short-sellers as sharks swarmed the brand for years as they thought they couldn't ramp up production to meet the actual demand. Tesla’s stock skyrocketed nonetheless.
Finsum: Short positions on these public favorites can be extremely risky poisons, there have been lots of strange rallies in the internet era.
The biggest hang up for most investors when it comes to direct indexing is the heavy minimum investment fees that usually accompany them. Fidelity shocked markets with their $5,000 minimum, but Altruist just lowballed them with a $2,000 product. This strategy used to be exclusively available to wealthy individuals but is now more accessible. Investors hold the underlying stocks that make up the indexing product which gives nice advantages when it comes to tax loss harvesting and green investing. The product will give investors exposure to global stock and bond markets as well as acap weighted 500 largest US stocks, and be available at a variety of risk levels.
Finsum: With the huge tax savings and lower investment minimums, direct indexing is more competitive with ETFs than it was even a year ago.
Macro factors are coalescing in a way we haven’t seen in years to produce the perfect storm of potential Volatility, and the VIX is just hovering around medium to long-run averages suggesting a potential swell could be incoming. Advisors should push clients to strategies that can avoid volatility rather than trying to guess this uncertainty. The best option may just be options; a covered-call strategy is a great way to avoid volatility. Investors can lean into betting on medium to long-run growth and sit out excess volatility. This strategy has setbacks particularly if stocks over-perform, so advisors and investors need to carefully monitor the futures market to take full advantage.
Finsum: Now is a great time to take advantage of anti-volatility strategies, yes they don’t have the long-run games but they have strong protections for market volatility.