Economy
Volatility has spiked in 2022 in response to rising rates and international turmoil, but that could be good news for financial advisors according to Cerulli. The latest Edge publication demonstrated that Advisors are being leaned on to deliver critical advice in response to high inflation, economic sluggishness, and deteriorating equity prices. For existing clients, they advise advisors to concentrate on tax loss harvesting and long-term planning. Advisor’s who capitalize on providing these while rebalancing risk in portfolios are putting their clients in the best position to hit a rally coming out of the turmoil. Advisors should lean into their attributes during high volatility.
Finsum: Research shows financial advisors provide critical value when it comes to relating to clients and helping them understand economic circumstances, volatility can provide a chance to capitalize.
Firms are buying up custom indexing solutions rapidly as possible in order to meet the excess demand coming from consumers, but also to prepare for the future. Investment experts and advisors believe there is a strong possibility that custom indexing will shake up the investment products space, the way ETFs redefined the early oughts. Olive Wyman expects custom solutions will capture $1.5 trillion of assets by 2025, over a 300% growth from the 2020 levels. Custom solutions are more flexible to address clients' desires, and they can be implemented to cater to ESG criteria more stringently than ETFs. However, the greatest advantage is their tax efficiency where stocks can be dropped for tax loss harvesting.
Finsum: Direct indexing has benefited from the rapid growth in fintech solutions, which have lowered minimums across the board.
According to the Index Industry Association’s annual ESG survey, 76% of respondents integrate ESG when running both passive and active fixed income mandates. This is a large jump from 42% in 2021. The survey, which was conducted with 300 asset managers, also found that 87% of passive asset managers are integrating ESG into their bond allocations. 85% of asset managers stated that ESG had become a higher priority over the past 12 months. Out of this figure, 43% said the concern around climate and corporate governance was the driving force behind that decision. Other reasons were a need for more diversified returns, regulatory and reputation risk, high energy prices, and geopolitical events. Almost a third cited a desire for increased returns. The biggest driver was their client’s knowledge of ESG, with 53% stating they were “very confident” in their clients' ESG knowledge.
Finsum: Asset managers are implementing ESG into fixed income allocations at a higher rate due to climate and corporate governance, diversified returns, higher energy prices, and client knowledge.
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2022 has seen one of the most volatile six-month stresses that hasn’t included a full-blown economic collapse. With the U.S. recession looming, Fed tightening, surging inflation, and international conflict all still very much in play investors need a volatility strategy. Most investors’ loss aversion keeps them out of market gains and a negative bias, and a low volatility strategy can curb those fears while allowing participation. This is a factor-based approach to investment where a considerable factor can be on stocks with more stable price movements in comparison to the rest of the market. Typically this strategy favors older, medium to large companies, with stable performance. If markets take a large hit many of these bear less of the losses, but they still can capture the rallies during high volatility.
Finsum: A momentum factor strategy has the advantage in low-interest rate booms, but favoring stable price movements might beat markets in this environment.
The markets rally in response to the Fed’s latest tightening cycle, but it's the movement in combination with bonds that are potentially concerning. The longer end of the yield curve may not be realizing the extent of the Fed tightening with the 10-year rates falling in response. Analysts say this could be markets reading what they want from the Fed and not taking this phase of tightening seriously. This also could be the opposite, as the ten-two-year yield curve inverts, this could be the markets predicting a recession on the horizon, that is if the U.S. isn’t currently in one. Regardless, Powell made it completely clear that inflation is concern number one, and the Fed doesn’t believe the economy can function normally until inflation is tamed.
Finsum: There’s a possibility markets are happy there is a recession, because it could be the return to easy money and low rates.
Available in a gaggle of shapes and sizes, fixed income securities are a staple of investor portfolios, according to etf.com.
They’re loans, of course, from the public investors to an institution in the market for cash. The borrowers and investors issue the bonds. Naturally, the investors expect to be reimbursed and compensated for the ability to tap into their money and the risk they’re assuming in extending the loan, the site continued.
Often, that compensation or the interest on the loan, is a regularly paid coupon.
With net inflows of $910 billion into U.S.-listed ETFs, ETS had an unprecedented year in 2021, according to eftdb.com. That said, with the momentum taking a turn later in the year, ETFs experienced a spike in flows, which is expected to extend into this year – in the fixed income space particularly, stated Todd Rosenbluth, head of ETF and mutual fund research at CFRA.
Meantime, logic seemed to go somewhat out the window with U.S ETF flows through June in light of persistent hearty inflows given markets that were drastically toppling, according to insight.factset.com. Although stocks sagged nearly twice as much, stocks experienced healthier ETF inflows than bonds.