In an article for Vettafi, James Comtois laid out some of the benefits of direct indexing for investors. Direct indexing has grown in popularity for certain investors because it leads to greater tax savings and customization than traditional passive and active funds.

In terms of taxes, direct indexing allows investors to sell losing positions and then buy back stocks with similar characteristics. Then, these tax losses can be harvested and used to offset capital gains, leading to a lower tax bill. 

Another beenfit of direct indexing is that it allows investors to have their personal values and preferences reflected in their investments. For instance, an investor may be uncomfortable with companies in a certain industry and can exclude them from being considered for investment. 

Many investors may also be in a unique situation such as having large exposure to a particular company due to stock options or family holdings. Direct indexing allows them to construct a portfolio that reduces this particular exchange, leading to a more resilient portfolio and financial situation.

Finsum: Direct indexing is growing in popularity as it offers some advantages of traditional funds. However, it’s likely not appropriate or necessary for most investors.

In March, investors withdrew a total of $5.7 billion from US-listed ESG ETFs, leaving ESG funds with total assets of $81 billion according to reporting from Barron’s Lauren Foster. 

A major factor in the outflows was Blackrock rebalancing its passive holdings which resulted in a $3.9 billion outflow in a single day. Other factors that accounted for this were cited as political backlash, increased regulatory scrutiny, poor performance, and market volatility. 

In Europe, ESG flows are also depressed relative to 2021 but remain positive. In the US, it’s become a political issue as many conservatives are criticizing corporations for involvement in political affairs. Recently, President Biden vetoed legislation that would prevent pension funds from considering ESG factors in their investments.

There has also been some movement at the state level where conservative leaders are pursuing actions such as divesting from financial institutions that don’t invest in energy companies or companies engaging in political activity. So far, these efforst have failed but show that the tide could be turning against ESG.

Finsum: ESG funds saw major outflows in March due to a variety of factors. However, it’s clear that ESG is increasingly becoming a political issue. 

In an article for Advisor Perspectives, Scott Welch and Kevin Flanagan of WisdomTree shared some strategies that can be used to generate income in the current market whether using model portfolios or ETFs.

Of course, this is a big change from the last decade when the Fed’s dovish policies meant that dividend yields on equities exceeded bond yields for the most part. This is no longer the case as the Fed is waging an aggressive hiking campaign to curb inflation even at the cost of a bump in the unemployment rate or a recession.

Thus, the Fed has already hiked rates to 5% and is forecast to hike two or three more times before the current cycle is terminated. More important, the Fed is ‘data-dependent’ and willing to change course depending on inflation and/or financial stability concerns.

This uncertainty and elevated rates mean there is a plethora of opportunities for investors to find income. For those who are comfortable with duration risk, high-yield bonds and equities are an option in addition to ETFs. For those not comfortable with duration risk, shorter-term notes and floating rate options are a good fit.

Finsum: After more than a decade of a paucity of options for income investors, the current market is offering a variety of opportunities.

Check your bank statement. Chances are – and this is just a hunch, mind you – it probably doesn’t total anywhere near oh, say, $10.82 billion. Double check it, in fact.

Point is: that’s the total which the global alternative market financing market came in at, according to grandviewresearch.com. Not only that, from 2023 to 2030, it’s expected to catapult at a compound annual growth rate of 20.2%. Fueling the industry’s been the need to access capital for small businesses and individuals. Given the stringent requirements among traditional banking institutions, it was that much tougher for many to secure loans. Enter alternative finance products. Especially among those who might fall short of meeting the rigid requirements of traditional banks, there’s a greater accessibility to capital through alternative finance products.

While yields have returned, in light of inflation and policy uncertainty, bonds just might have to apply a little elbow grease to deliver the degree of diversification they at one time dispensed, according to blackrock.com.

Seems that fixed income’s calling and it might pay to presume it’s not someone hawking insurance.

In 2023, it “has a huge potential” to dispense strong returns, according to Joanna Gallegos, co founder of BondBloxx Investment Management, reported yahoo.com, which carried an article earlier in the year which originally was published on ETFTrends.com. That said, it remains a good idea to be cautious.

Worth investing time in, especially: high yield corporate debt. That’s because they offer high yields and it’s projected by Bond Boxx that corporate defaults, compared to their long term average, will remain lower.

Tormented by hyper interest rate spikes that culminated in spiraling bonds yields, 2022 was one of the worse for fixed income, added money.usnews.com.

It sparked a deep dive of price of fixed income assets, and longer duration issues in particular.  

This year? Oh how the page turns. Paul Malloy, head of municipals at Vanguard, said "the 2023 outlook is drastically different than the position we found ourselves in last year,” Indeed, fixed-income investors started 2022 with a near-zero federal funds rate, but are now entering 2023 with a rate of 4%-plus. According to Malloy, the Federal Reserve "front-loaded" much of its policy tightening this cycle and is likely nearing a wrap.

“The fixed income asset class has a huge potential to deliver better performance in 2023,” Gallegos said on CNBC’s “Worldwide Exchange.” “We’re at new rate levels we haven’t seen in over a decade plus, and so, you’re really resetting valuations in a way that are very attractive.”

About 14% of advisors are aware of and recommend direct indexing solutions to their clients which is the primary reason that its forecast to grow faster than ETFs over the next decade. In a recent article by Allen Roth of WealthLogic, he discusses the pros and cons of direct indexing and compares it to ETFs.

Direct indexing has many of the same characteristics as ETFs such as allowing exposure to broad categories and having low costs. However, it allows for greater customization that can allow for portfolios that are more tailored to a client’s needs. 

Another distinct  advantage of direct indexing are that it allows for tax-loss harvesting which can offset capital gains. This strategy can allow for an additional 0.2 to 1% of returns and is more beneficial in down years. 

In terms of disadvantages, many of the most popular ETFs have less costs than direct indexing. For example, the most popular S&P 500 ETFs have annual expenses of 0.03%, while most direct indexing fees are in the 0.4% range. 

While this won’t make a different in the near-term, it will matter in the long-term especially as tax-loss harvesting benefits erode over time. Additionally, the slight tax benefits may be outweighed by the tax complications as each trade needs to be accounted for.

Finsum: Direct indexing is expected to grow at a faster rate than ETFs over the next decade. Yet for many investors, ETF remain the better choice.

Treasuries returned 3% in Q1 which is its best quarterly performance since 2020. In an article for Bloomberg, Liz McCormick and Michael Mackenzie covered some reasons for why this outperformance should continue. 

Three of the major factors are expectations of increased demand from Japan, a weeklong pause in auctions, and strong inflows from institutional and retail investors amid higher rates and wobbles for the banking system. 

The next major, market-moving event will be the March jobs report on Friday. Some analysts see the potential for weakness in Treasuries if there is a strong report regarding wages and jobs. This could undermine of the catalyst behind the Treasury rally - expectations that the Fed’s hiking cycle is nearly over. On the other hand, Treasuries could rally with a weak report.

Demand for Treasuries spiked amid the bank failures last month. As a result, yields for short-term notes tumbled to their lowest levels of the year with the 2-year Treasury yield declining by a 100 basis points. It also led to market expectations of the Fed terminal rate declining, while odds of the next Fed move being a cut rather than a hike, also jumped higher.

Finsum: Treasuries outperformed in Q1 with a major catalyst being bank failures which led to a surge in demand for safe-haven assets.

After a decade of low rates and abundant central bank liquidity, market conditions are going to be much more challenging over the next decade. According to Jason Xavier, Head of EMEA ETF Capital Markets at Franklin Templeton, these developments mean that a major opportunity is brewing for active fixed income ETFs. He discussed this in a post for Franklin Templeton’s Beyond Bulls & Bears publication.

While most fixed income ETFs are passive, the active category is exploding in response to the need of investors to express various views. In contrast to passive strategies, active ETFs utilize fundamental analysis and have greater discretions on which instruments they can select rather than be limited by an index. Active managers have greater flexibility to respond to a change in market conditions or external catalysts unlike passive managers. 

In the fixed income space, the ETF structure leads to increased price transparency and liquidity especially compared to traditional bond markets which are typically quite opaque. ETFs also give smaller investors access to fixed income opportunities which were typically only available to high net worth investors or institutions. 

In sum, Xavier believes active fixed income ETFs will continue to see growth as they are likely to outperform in more volatile conditions and will lead to increased transparency and liquidity in the fixed income market.

Finsum: Franklin Templeton’s Jason Xavier sees the active fixed income ETF category continuing to rapidly grow as it offers major benefits to investors.

A recent article from Morningstar’s John Rekenthaler discussed the tax benefits of direct indexing. Direct indexing is a strategy that involves directly buying the stocks of an index rather than through a fund. 

This confers several benefits such as allowing investors to gain the benefits of indexing while still being able to customize their portfolio to reflect their values and better fit their needs. Due to this, the category has exploded and gone from a niche offering solely for high net-worth investors to being offered by retail brokerages to customers for as little as $5,000.

However, the strategy is not necessarily for everyone, but it can be particularly useful for those with sizeable assets due to the potential tax benefits. This is because direct indexing results in capital losses in a separate account when stocks drop below their cost bases. The proceeds are then re-invested in stocks with similar profiles. 

This strategy can be particularly useful for investors with high federal and state taxes, large amounts of money invested in direct indexing vs other investments, short-term capital gains, and dealing with a volatile market environment. 

FinSum: Direct indexing comes with several benefits for clients but the most substantial one is the tax savings. However, it’s only worthwhile for a particular group of investors.

Short-term dated options are continuing to grow in popularity which many analysts are warning could have unintended consequences for market stability according to a Reuters article by Saqib Iqbal Ahmed.

The fastest growing segment is zero days to expiry (ODTE) options, where traders are looking to profit from small, intraday market moves. Most options are based on indices, popular ETFs, or single stocks. As of March 2022, the daily notional value of all ODTE trades had exceeded $1 trillion.

The contracts are popular among buyers, because small moves in the underlying instrument can result in huge moves for its derivatives. For sellers, the appeal is that the options decay in value and the trade can be closed at the end of the day. 

However, many warn that large positions in these options could set off a ‘squeeze’ in the event of an unexpected, intraday move. This would cause option sellers to take large losses and potentially force hedging which could exacerbate the move in the underlying instruments. According to JPMorgan, it would be a similar dynamic to the ‘Volmageddon’ crash of 2018 when many inverse volatility products crashed due to a large spike in the VIX.

Finsum: A new threat to market stability is the rise of ODTE options which are becoming very popular with retail and institutional traders. However, they do have the potential to exacerbate large, intraday market moves.