Economy
Bond ETFs are seeing major inflows as of late because they have liquidity advantages over their underlying bonds and they have tax benefits. However according to Todd Rosenbluth, research head at VettaFi, in a conversation with MarketWatch, Vanguards Total Bond Market ETF, BND, is standing out from the crowd. One of the main advantages that BND has is investors transitioning from mutual funds into ETFs. Additionally, investors are capitalizing on tax-loss harvesting in the bond market which has taken a hit in H1 2022, both of these have been wins for BND. Vanguard users can also easily transition from mutual funds to ETFs. Moreover, investors are looking for safer storage of money, and shorter-duration treasuries and bonds are a good place to do that.
Finsum: The liquidity mismatch in the bond market is a huge advantage for ETFs and investors should heavily consider this.
Policymakers have been begging for a break in Oil and gas prices and the last week finally started to see the turning point. While demand is beginning to soften, which no doubt will help loosen the tight oil market, a surge in Libyan crude output pushed futures lower. Adding to that are the overwhelming signs that oil prices will also fall if the global economy takes a step back. Markets are preparing for recessions in the U.S. and the Euro area. Central bankers across the globe are committed to subduing rampant inflation and as much as a 1% hike in the Federal Funds rate could happen at the next Fed meeting. A recession would significantly reduce U.S. oil demand.
Finsum: There is still plenty of pressure on Oil prices with the War on Ukraine continuing, and supply bottlenecks are still the driving force.
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.
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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.
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.