Direct indexing has recently become a hot topic in the financial industry and for advisors looking to differentiate themselves from the pack, fund giant Vanguard recently identified four situations that they should consider using direct indexing. The first is tax-loss harvesting. For example, when an index is up, some of its holdings can be trading at a loss. An investor in a direct indexing strategy can sell those stocks and create a tax loss that can be used to offset taxes that are due as a result of an overall gain for the index. The firm also lists ESG as another reason. A custom index can be designed to avoid shares of firms involved with fossil fuels. The third situation is factor investing, or investing in companies that have specific factors such as growth, value, or quality. A custom index can be created to meet those criteria. The last situation Vanguard recommends is diversification. A custom index can be built to accommodate an investor that may be required to hold a certain number of shares in his or her employer.

Finsum:According toVanguard, tax-loss harvesting, ESG, factor investing, and diversification are four strategies that advisors should consider when building custom indexes.

While the SEC has been pushing public companies to improve their cybersecurity, minimal adoption of stronger cybersecurity rules has led the agency to draft new rules requiring more formal cybersecurity reporting and disclosure. The SEC proposal outlined several requirements that are designed to improve cybersecurity awareness and reporting for corporate executives and board members. The first is cybersecurity incident reporting, including current reporting about material incidents and periodic reporting about previous incidents. The second requirement is cybersecurity policies such as periodic reporting about policies and procedures to identify and manage risks. The third proposal is management requirements including management’s role and expertise in assessing and managing risk and management’s role and expertise in implementing policies and procedures. The final requirement is board oversight such as reporting on how the board of directors performs oversight on cybersecurity and disclosure of the board of directors’ cybersecurity expertise if any.

Finsum:The SEC recently drafted new cybersecurity rules for companies, including incident reporting, policies, management requirements, and board oversight.

You can, um, bank on it; as sure as taxes and a Nolan Ryan fastball – at least back in the day – for a panacea of reasons, financial advisors regularly switch firms, according to visionretirement.com.

You know; as in now you see ‘em, now, well, not exactly. Good. You get it. Let’s face it: maybe they receive more cash or chances to move their careers forward elsewhere. Whatever the case. you name it, and a bolt of lightning later, they’re out like the wind.

Of course, like many other professions, exactly when they decide to cut the cord isn’t necessarily based on when, according to financial-planning.com. There’s no idyllic time.

Naturally, it helps to have a robust relationship with clients. That way, an advisor can move on to greener pastures no matter how the market’s performing. Maybe he or she wants to upgrade their technology and a broader menu of products. On the other hand, perhaps they’re intent on leveraging on the expansion of their practice or set themselves up to call it a career.

Meantime, clients might be caught off guard when their advisors pull up stakes, noted visionretirement.com. But, hey, there’s always this: a client can maintain a relationship with an advisor or nip it in the old bud or sniff out other options.  Call it an Amazon shopping spree. Or not!

Over the past several months, financial firms are seeing an uptick in ransomware attacks. In fact, IT security professionals in the financial industry have noted that ransomware attacks have not only become more common but have also become more sophisticated. Cybersecurity professionals are seeing a new wave of threats that banks and investment firms are struggling to prevent. Over the past two years, financial firms are seeing more ransomware attacks that utilize outside service providers which are also known as ransomware-as-a-service. Firms are also seeing variants that have chosen different attack vectors, meaning they are now attacking other areas of firms such as corporate phone systems. According to Sophos’ The State of Ransomware in Financial Services 2022, 55% of financial service firms were victims of at least one attack in 2021, up from 34% in the previous year. The bigger issue for banks and other financial firms though is not just the number of ransomware threats, but their increasing sophistication.

Finsum:Financial firms are not only seeing an increase in ransomware threats, but the sophistication of attacks has also increased.

Lingering doubts over escalation inflation and the response of the Fed aside, longer duration US Treasuries and investment grade corporate debt ETFS are the cat’s meow among European investors, according to etf.com.

As of the end of July, in Europe, fixed income ETFs attracted more than $4.2bn over the past three months, according to data from Bloomberg Intelligence.

Meantime, Fitch Ratings reported that, in all likelihood, U.S. insurers will continue, unabated, to up their fixed income exchange-traded fund holdings, according to pioonline.com.

Since last December – when new guidelines kicked in in The Big Apple -- Fitch indicated it has rated 10 such ETFs. It eased the way for insurers to hang onto shares of fixed income ETFs. Until Jan. 1, 2027, shares of an ETF, for the purpose of a domestic insurer’s risk based capital report, on the condition the ETF satisfies certain criteria, in a regulation adopted by the New York State Department of Financial Services. It became effective Dec. 15.

Not a fan of leaping off a tall building in a single, crisp bound? Without a parachute? Odd but, well, okay.

Nevertheless, if that’s your mentality, you might tip your glass to active fixed income management. Afterall, one of the primary things it delivers is mitigating risk, according to npifund.ngontinh24.com.

For example, it yields investments beyond the fixed income benchmark index and facilitates the ability of managers to either push or tamp down risk. A passive strategy? Um, nada.

And active fixed income managers who have their antenna up can abandon possible issues before the wreak havoc on client portfolios, the site continued.

And that’s not all, no siree. They also rachet down interest rate sensitivity and keep their hands firmly on the wheel when it comes keeping the length of risk under their thumb, according to catalyst-insights.com. What’s more, they’re adept at uncovering yield against a low yield backdrop and get the most out of the trade off between duration exposure and yield capture.

And you might say they’re rather nimble, with an ability to seize on opportunities stemming from dynamic economic and policy shifts. A prime example, if you’re really keen on being reminded: the recent steepening of the bears. Gee, thanks, ladies and gentlemen, right?

Invesco, which is the fourth-largest U.S. ETF firm based on total assets, recently filed for four actively managed fixed-income ETFs. The fund firm is currently best known for its index-based funds and custom index strategies. However, the company is looking to branch out by adding actively managed fixed income to its stable. In a series of regulatory filings, the firm filed for four ETFs, including the Invesco High Yield Select ETF, the Invesco Municipal Strategic Income ETF, the Invesco Short Duration Bond ETF, and the Invesco CLO Floating Rate Note ETF. The Invesco High Yield Select ETF will be run by a team of managers led by Niklas Nordenfelt who currently leads Invesco’s High Yield fixed income team and recently took over the Invesco High Yield mutual fund. The Invesco Municipal Strategic Income ETF will invest 50%–65% of its assets in low- to medium-quality municipal securities, which the company defines as bonds rated BBB. The Invesco Short Duration Bond ETF will utilize the Bloomberg 1-3 Year Government/Credit Index as a reference in designing the portfolio. The Invesco CLO Floating Rate Note ETF will primarily invest in collateralized loan obligations that have limited interest rate sensitivity and strong credit profiles.

Finsum:Invesco is looking to expand its ETF product line with the registration of four actively managed bond ETFs.

While rate hikes appear to be hurting stock and bond prices this year, the rise in yields has made short-term bond ETFs more attractive to yield-seeking investors. As the Fed continues to lift its benchmark federal funds rate to target inflation, bond rates have followed suit. This has been especially true for short-term bonds. In fact, short-term rates are even yielding more than longer-term rates in some cases. For example, the two-year Treasury note had a recent yield of 4%, which was higher than the 10-year Treasury note, with a yield of 3.58%. Plus, investors in short-term bonds are taking on less interest rate risk while getting paid more in interest. If rates continue to rise, bonds with shorter maturities are expected to fall less in price than longer-term bonds. That makes short-term bond ETFs an attractive option for income investors. For instance, the iShares Short Treasury Bond ETF (SHV), which holds Treasuries with maturities of less than a year, has a 30-Day SEC yield of 2.69%, while its price performance on the year is essentially flat.

Finsum:The Fed’s current interest rate policy has resulted in higher yields and less risk for short-term bond ETFs.

According to a recent Charles Schwab RIA Benchmarking Study, talent is the top strategic priority for RIAs. This matches a Talent Management Study from San Francisco-based RIA consultancy DeVoe & Co., which showed recruiting is the biggest concern RIAs face today concerning talent. A recent Barron’s article highlighted the challenges RIA face when recruiting advisors. Firms are facing headwinds such as a rapidly aging workforce, a lack of young advisors to take over, loss of talent from the Great Resignation, and competition from mega financial firms. Barron’s highlighted the fact that over one-third of advisors are likely to retire within the next 10 years according to a study by Cerulli Associates. In addition, according to a survey by Ameriprise Financial, advisory firms currently have an average of three open positions at their firms. Some RIAs are turning to college students to fill the talent gap as the competition for experienced advisors is immense, while others are recruiting from banks and offering perks such as firm equity, high cash compensation, and generous payouts.

Finsum:Due to an aging workforce and strong competition, recruiting is a top priority for many RIA firms.

by Thomas Forsha, CFA

Is now the time to be adding dividend-paying stocks to your portfolio? With interest rates moving higher, and deflationary pressures subsiding, the key drivers of growth outperformance over the past decade appear to be stalling.

What seems to be a longer-term shift may support value and higher quality dividend-paying companies versus speculative growth companies.

The promise of a dividend check provides an additional dose of certainty for investors. According to Ned Davis Research, dividend-paying stocks in the S&P 500® tend to underperform non-payers in the months leading up to the first-rate increase of a tightening cycle, but in the years after the initial increase dividend payers have outperformed on average by a wide margin. While the past decade has been tough for dividend-focused investors, the best performance for dividend payers has historically been the period that followed the first fed funds rate increase. 

Source: Ned Davis Research, Inc. See NDR Disclaimer at www.ndr/copyright.html.

For vendor disclaimers refer to www. ndr.com/vendorinfo/

With interest rates marching higher and the yield curve steepening, Ned Davis Research points toward the potential for the outperformance of value stocks during a rising rate environment. Will the yield curve steepen over the second half of the year as the Federal Reserve is able to successfully manage a soft landing for the economy, or will tightening prompt a recession causing the yield curve to collapse again? Either outcome is likely to prove favorable for the relative performance of value strategies. And historically, the average value stock tends to enjoy higher dividend income than the average growth stock.  

Past performance is not a guarantee of future results.

Diversification does not guarantee a profit or protect against a loss in declining markets.

Investing involves risk including possible loss of principal. There is no guarantee that these investment strategies will work under all market conditions, and each investor should evaluate their ability to invest for a long term, especially during periods of downturns in the market.

The S&P 500 Index is a capitalization-weighted index of 500 stocks. The S&P 500 Index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

This does not constitute investment advice or an investment recommendation.

This represents the views and opinions of River Road Asset Management. It does not constitute investment advice or an offer or solicitation to purchase or sell any security and is subject to change at any time due to changes in market or economic conditions. The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader theme.

Data is from what we believe to be reliable sources, but it cannot be guaranteed. River Road Asset Management assumes no responsibility for the accuracy of the data provided by outside sources.