With many economists predicting an economic downturn, investors may wonder how ESG investments will perform in a major recession. To find the answer, Portfolio Adviser asked a cross-section of industry commentators for their views. According to Max Richardson, senior director, of wealth planning at Investec Wealth & Investment, research on ESG performance during recessions is limited, but available studies suggest mixed results. For instance, a study by MSCI found that ESG stocks outperformed traditional ones during the 2008 financial crisis, with a lower decline in stock prices and a faster recovery. However, a study by the London School of Economics found that ESG stocks performed no better or worse than traditional stocks during the 2008 crisis. In fact, the impact of the crisis on ESG stocks was largely dependent on the specific industries and companies, not their ESG status. Amanda Sillars, fund manager and ESG director at Jupiter Merlin believes funds that exclude entire sectors on ESG grounds, which are typically oil, gas, miners, and defense, "run the risk of delivering weak absolute performance if those sectors outperform.” In contrast, “Fund managers who retain a broad investment universe and select companies that generate strong cashflows, minimal debt and are valued cheaply, while keeping company engagement at the heart of their investment strategy, are likely to fare better during a recession.

Finsum:According to a wealth planner, studies on ESG performance during a recession are mixed, but a fund selector believes that managers who focus on engagement and not exclusion will fare better in a recession.

Vanguard recently expanded its tax-exempt bond ETF lineup with the launch of the Vanguard Short-Term Tax-Exempt Bond ETF (VTES), which is built to help investors earn consistent, tax-exempt income. The fund’s objective is to track the performance of the S&P 0-7 Year National AMT-Free Municipal Bond Index using a sampling technique to closely match key benchmark characteristics. The index measures the investment-grade segment of the U.S. municipal bond market with maturities between one month and 7 years. This is Vanguard’s first US-listed ETF launch in nearly two years. The ETF, which is managed by Vanguard Fixed Income Group, has been listed on NYSE Arca with an expense ratio of 0.07%. Sara Devereux, Global Head of Vanguard Fixed Income Group had this to say about the launch, “The Vanguard Short-Term Tax-Exempt Bond ETF is built to optimize tax efficiency for investors seeking to allocate to the shorter end of the municipal bond market. The new ETF complements our broad fixed income line-up and provides clients with another avenue to tap our municipal bond team’s talent and capabilities.”

Finsum:Vanguard expanded its tax-exempt bond ETF lineup with the launch of the Vanguard Short-Term Tax-Exempt Bond ETF (VTES), its first US-listed ETF launch in nearly two years.

Allan Roth, founder of Wealth Logic LLC recently penned an article for etf.com where he provided his opinion on direct indexing vs. ETFs. While direct indexing is forecasted to attract assets at a faster pace than ETFs, according to a recent report by Cerulli Associates, Roth believes that direct indexing is not better than ETFs. While he does mention the benefits of direct indexing such as tax advantages, customization, and low annual costs, he asked, “But is direct indexing better than ETFs?" He added, "Generally they are not, in my view, at least not compared to the best ETFs.” He uses the S&P 500 as an example. Vanguard’s VOO ETF has a 0.03% annual expense ratio, while direct indexing typically has an annual fee of at least 0.40% annually. Roth does say that the 0.37 percentage point differential could be made up from the benefit of tax-loss harvesting in the early years, but he believes it likely won’t continue. That is because the stock market “generally moves up in the long run, so each year there is less and less tax-loss harvesting. Yet the fees continue.” In addition, after a few years, he says that “the tax benefit is minimal, and all that is left are fees and complexities.”

Finsum:Financial planner Allan Roth recently wrote an article for etf.com where he stated that direct indexing is not better than ETFs since direct indexing is more expensive and its tax benefits are minimal after a few years.

According to the third annual Alternatives Watch (AW) Research Investor Compendium commissioned by Vidrio Financial, there was a strong uptick in the amount of alternative investment mandate activity across some of the largest institutional investors. In 2021, AW's second annual compendium tracked a total of $130 billion in new capital across more than 900 individual institutional investor mandates from 50 of the top alternative allocators. That figure jumped to $144 billion in 2022, an increase of over 10%, across more than 1,000 individual mandates. There was also an increase in investor interest across infrastructure and real asset strategies to $6.9 billion and $4.9 billion, respectively, as those strategies act as inflation hedges. Other key findings include a muted slowdown in private equity assets, while there was a pick-up in activity in hedge funds as large institutional players sought to purchase risk-mitigating assets throughout the year. In addition, total private equity and venture capital mandates accounted for over half the mandates in the compendium and were spread out across the world, as investors embraced life sciences and technology sectors. Mazen Jabban, Chairman and CEO, of Vidrio Financial, stated, "As we saw in this year's Compendium performance data, Vidrio Financial continues to observe alternative asset classes growing in importance for institutional investment teams who work to take advantage of illiquidity premiums in the private markets while also seeking greater transparency into these types of investments."

Finsum:According to the third annual Alternatives Watch Research Investor Compendium, there was a 10% uptick in the amount of alternative investment mandate activity across some of the largest institutional investors.

LPL Financial scoops up three Wells Fargo Advisors teams who are partnering up in Charlotte, North Carolina, to create a single $1.45 billion practice. The three teams, which generated $10.5 million in revenue at Wells, moved on March 2 and joined LPL’s Strategic Wealth Services channel, which launched almost three years ago and is aimed at attracting teams from full-service firms. The new practice, Carnegie Private Wealth, is led by Angie Ostendarp, Jordan Raniszeski, and Mary Sherrill Ware, whose team at Wells had $1.1 billion in assets. Ostendarp started her career at Wells’ Wachovia predecessor in 1994. Raniszeski spent all 16 years of his career at Wells, aside from a short stint at Deloitte & Touche Investment Advisors in 2004. Ware was at Wells for her whole 16-year career. Mitch Mayfield, who has nearly 30 years of experience, all at Wells and its predecessors, is partnering with Ostendarp’s team. He had known Ostendarp from the training program at Wachovia. Jeff Vandiver, who has been friends with the other advisors for 20 years and has thirty years of experience, rounds out the new practice. He started his career at Wells predecessor First Union Brokerage Services in 1993. Raniszeski said the following in a statement, “The opportunity to create our own firm at LPL with a culture that prioritizes clients’ needs and interests above everything else just felt like the right way forward.”

Finsum:LPL recruited three separate Wells Fargo teams, who are joining together to form a new combined practice at LPL as they believe its culture prioritizes clients’ needs and interests above everything else.

Investors poured into U.S government bonds Monday after last week’s collapse of Silicon Valley Bank. This sent Treasury yields plunging. The 2-year Treasury yield was recently trading at 4.06%, down 100 basis points or a full percentage point, since Wednesday. This marks the largest three-day decline for the 2-yield since Oct. 22, 1987, when the yield fell 117 basis points. That move followed the October 19th, 1987 stock market crash, which is also known as “Black Monday.” The yield on the 10-year Treasury was down just under 20 basis points. Prices soared and yields fell after news of the collapse of Silicon Valley Bank. Regulators took over the bank on Friday after mass withdrawals on Thursday led to a bank run. Regulators announced on Sunday that they would guarantee Silicon Valley Bank’s depositors. With fears of contagion across the banking sector spiking, investors looked to government bonds for safety. Investors are also rethinking how aggressive the Federal Reserve will be with rate hikes after the bank’s collapse. This helped to send short-term yields lower. The Fed is meeting next week and was expected to raise rates for the ninth time since last March. However, Silicon Valley Bank’s collapse may change that. Goldman Sachs certainly thinks so. The investment bank no longer thinks the Fed will hike rates, citing “recent stress” in the financial sector.

Finsum:After Silicon Valley Bank’s recent collapse, fears of contagion across the banking sector spread, driving investors into Treasury bonds, which sent yields tumbling.

In a recent article for John Hancock’s Recent Viewpoints, Steve L. Deroian, Head of Asset Allocation Models and ETF Strategy offered his take on why active fixed-income ETFs provide value. Deroian noted that while active ETFs have slowly gained traction since they first appeared in 2008, there have been recent signs that investors are becoming more interested in gaining exposure to active management in ETFs. In fact, since 2008, the number of active fixed-income ETFs has grown exponentially. In John Hancock’s opinion, one factor behind the rapid growth is the changing composition of the U.S. bond market over the past ten years. Passive strategies have become much more concentrated in government debt. At the end of December, Treasuries accounted for over 40% of the Bloomberg U.S. Aggregate Bond Index, while the duration of the index has risen and is now at more than six years, indicating passive fixed-income ETFs carry a fair amount of interest-rate risk. Active fixed-income ETFs, on the other hand, aren’t required to track the benchmark. They can instead shift duration based on the manager’s outlook for interest rates. The management team can also manage sector allocation based on its ability to find relative value opportunities. Since the range of returns between fixed-income sectors can often be large, this creates an opportunity for active managers to add value over time.

Finsum:The number of active fixed-income ETFs has grown exponentially and John Hancock’s Steve L. Deroian believes one reason for that is the concentration of government debt in passive bond ETFs that carries a fair amount of interest-rate risk.

According to research from data analytics company Coalition Greenwich, the influence of some corporate bond ETFs on their underlying holdings has increased, as the electronification of fixed-income trading has created an upheaval in how bonds are traded. The firm found that the trading volumes of 12 of the largest corporate bond ETFs rose from 18% of the turnover in their constituent investment grade and high-yield bonds in 2021 to 23% in 2022. In addition, the proportion was even more marked when Coalition Greenwich narrowed its focus to the five high-yield ETFs in its study. In this case, it found average daily notional volume soared from 30.5% of the underlying bonds in 2021 to 47.4%. What this means is that ETFs accounted for nearly half of the daily traded value of the underlying bonds. Kevin McPartland, head of market structure and technology research at Coalition Greenwich stated, “In the last three years everything has changed, all bond market participants now traded at least some of their volume electronically, which was transforming the market.” The increasing share of volume traded is an indication of a revolution in which corporate bonds are traded. Fixed-income ETFs have helped to increase the electronification of the corporate bond market, which has resulted in better price discovery, liquidity, and tighter spreads.

Finsum:According to research from data analytics company Coalition Greenwich,the trading volumes of some of the largest corporate bond ETFs are rising and accounting for a higher daily traded value of the underlying bonds.

In a recent article for the Wall Street Journal, author Mark Hulbert defends the use of ETFs in opposition to people who say direct indexing is a superior method of investing. Many brokerage firms that have created direct-indexing platforms say direct indexing is better as it allows investors to create a customized index without stocks that they don't want and also can strategically harvest tax losses. However, Hubert believes that most of direct indexing’s supposed advantages can be duplicated by ETFs at a lower cost. For instance, customizing an index can be duplicated. According to Lawrence Tint, the former U.S. CEO of BGI, the organization that created iShares, now part of BlackRock, anybody could achieve the same result by buying a generic index ETF and then selling short the stocks that we want to avoid. Tint also doubts that direct indexing’s ability to harvest tax losses outweighs the cost savings of investing in a low-cost ETF. He stated that, over time, an investor who sells his losers from his direct-index portfolio will increasingly be left with a portfolio of mostly unrealized gains. So, the benefit of being able to decide when to take tax losses will fall over time. An investor will also have to pay higher fees each year to maintain the direct index. In addition, he also noted that tax-loss harvesting is only applicable to taxable accounts.

Finsum:In an article for the Wall Street Journal, author Mark Hulbert defends the use of ETFs against direct indexing as its ability to harvest tax losses outweighs the cost savings of a low-cost ETF, while customization can be replicated by buying an index and shorting the stocks you don’t want.

While offshore oil drilling has been growing slowly in recent years, research firm Rystad Energy expects a surge in new spending over the next two years. Energy companies had previously been hesitant to commit to expensive new projects that can take years to pay off. But with oil and gas demand rising after the pandemic, some companies are now looking for projects that can offer reliable production in the longer term. According to Rystad Energy, the offshore oil and gas industry has $214 billion of new project investments lined up in the next two years, the highest two-year total in a decade. In fact, it will mark the first time since 2012-2013 that companies have spent this much to develop offshore projects. According to Rystad, “Offshore activity is expected to account for 68% of all sanctioned conventional hydrocarbons in 2023 and 2024, up from 40% between 2015-2018.” Middle Eastern producers will account for most of the growth, however, there are projects off several continents. For example, U.K. offshore spending is expected to rise 30% this year to $7 billion, while spending on Norwegian projects could increase 22% to $21 billion, according to Rystad. Plus, North America, Brazil, and Guyana are all seeing growth as well.

Finsum:According to research firm Rystad Energy, a surge in new spending for offshore oil drilling is expected over the next two years as companies look for projects that can offer reliable production in the longer term with oil and gas demand rising.