Displaying items by tag: fixed income

(New York)

Bond ETFs ae set to break a landmark record this year—$1 tn in AUM. The number is a big deal for bond ETFs, which got off to a slower start than their equity counterparts. In recent years, though, bond ETFs have seen huge inflows as they allow investors a more liquid option for both strategic and longer-term allocations. The market is also seeing a good deal of innovation, with more nuanced approaches spreading much like they have in equities.

FINSUM: Overall this is excellent news for investors. More AUM means more liquidity, more options, and lower costs. There are still some fears about a liquidity mismatch between the ETF and the underlying blowing up during a crisis, but those have never materialized.

(New York)

Active funds have been much maligned in the press over the last couple of years. The rise of passive investing has drawn the value of active investing into question, and the media has focused lot of attention on large groups of underperforming funds. That said, active funds, at least in fixed income, are winning right now. In every period from one to ten-years, actively managed bond funds have outperformed ETFs. Such funds are less constrained in their ability to seek out safe high yields, whether that be in junk bonds or emerging markets.

FINSUM: In many ways this makes sense, as there are many more bonds than there are equities, which means that there is likely more alpha to be generated through an unconstrained approach.

(New York)

There are a lot of investors out there worried about rates moving higher and bond prices falling as a result. Treasury yields have moved much higher over the last year, which has spooked investors. All that said, one fund manager thinks investors shouldn’t fret too much. The reason why is that markets likely have already priced in rate hikes in, so losses shouldn’t be much. Furthermore, we have actually entered a more normal yield environment, where one can earn meaningful yields on shorter-term credits that don’t have much interest rate risk.

FINSUM: This article raises a good point about the current yield environment. While rate driven losses are worrying, we have finally entered an environment where one can earn comfortable yields on interest rate hedged portfolios.

(New York)

ETFs are a product that has been growing at breakneck speed. AUM in the product is approaching $4 tn, which is astonishing given that it has really only taken a decade to get there, but still quite a bit smaller than the $16 tn in mutual funds. Experts say that the ETF market is going to increasingly resemble the mutual fund market as offerings diversify into smart beta, thematic ETFs, customizable ETFs, and fixed income. The last area—fixed income—is where creative indexing makes the most sense, as doing so can account for the common weighting issues that are much riskier in bonds than in equities (you don’t want your largest holding to be the issuer with the most debt).

FINSUM: The logic for fixed income ETFs is very strong, especially given how illiquid and restrictive buying bonds directly is. However, smart beta and other active ETFs (which are more expensive) don’t really have a big leg up on experienced mutual funds.

(New York)

Investors in fixed income need to be aware of a brand new loophole that was just opened to Delaware-based companies. A new provision allows companies (specifically LLCs) to split in two and divide their assets and liabilities between them as they see fit. The rule would allow companies to put certain assets beyond the reach of creditors, for instance putting debt in one entity and assets in another. The big problem is that most bonds don’t have provisions to protect against this behavior because it didn’t exist as a concept or legal process until it was approved this month. Another issue is that many contracts are written from the perspective of New York law, but that might have not much weight with Delaware-based rules.

FINSUM: This is a messy problem for anyone who owns private or smaller company debt. We thought investors should be made aware right away.