(Washington)

Beto O’Rourke, long expected to step into the race for the Democratic bid, has finally announced he will. The young Texan lost a close race to Ted Cruz in Texas in November, but is aiming to ride his surge in popularity to the White House. Unlike many other contenders from the Democratic party, he is more of a centrist, not adopting the now-common socialist platform. Commenting on his candidacy, Beto says “The challenges that we face right now, the interconnected crises in our economy, our democracy and our climate have never been greater. They will either consume us, or they will afford us the greatest opportunity to unleash the genius of the United States of America”.

FINSUM: Outside of maybe Bernie Sanders, we think Beto is the biggest contender to Trump because he may be able to simultaneously get voters on the far left and some of Trump’s more centrist supporters.

(New York)

Well, it has finally happened, but not as anyone expected. The whole industry has been watching for the first zero fee ETF, which just happened with SoFi, but now they are getting the first negative fee ETF. While zero fee index mutual funds debuted last year, ETFs only just got there, until the debut of the SALT Financial Low TruBeta US Market ETF. For every $10,000 invested in the new fund, the issuer will pay you $5. However, as you may have expected, there is a catch. The catch is that once the fund gets over $100m in AUM, its regular fee of 0.29% kicks in.

FINSUM: This is nothing more than a sales gimmick (and they haven’t even structured it well). However, it is indicative of the trend things are heading in.

(New York)

Morgan Stanley just put a big threat on the table, and they are not alone. The bank says that it may withdraw wealth management services entirely from states considering new fiduciary rules, such as Nevada. Wells Fargo issued a similar threat. A number of states, including Nevada, New York, New Jersey, and Maryland, are considering making their own fiduciary rules. Such rules would be a major headache to the brokerage industry as they would create patchwork rules across the country. Morgan Stanley said bluntly “Absent substantial changes to the [state] proposal, Morgan Stanley will be unable to provide brokerage services to residents of the state of Nevada”. Edward Jones, TDA, and Charles Schwab also said they would need to at least pair back offerings.

FINSUM: This is a strong move by the brokerage industry but we do not think it will work. The political mood in the states mean lawmakers would rather say “good riddance” than back off, but time will tell.

(New York)

If you are of the opinion that rates are not going to move higher, or if just want some great yields and aren’t too worried about rates, take a look at mortgage REIT ETFs. Mortgage REITs are a special subsector of the REIT industry, and have recently become greatly more accessible because of ETFs. For instance, consider the iShares Mortgage Real Estate ETF (REM). The fund has a 30-day SEC yield of 9.36%. It is obviously rate sensitive, but even during last year’s brutal hiking cycle, it only lost 3.75%.

FINSUM: If the Fed stays put this year, which it likely will, these could be a great investment as we head into a downward rate cycle.

(New York)
“Cross-selling” has been the name of the game at Bank of America Merrill Lynch for years, but Merrill is about to take the idea to new heights. Partnering with BofA, the Thundering Herd is now offering mortgage discounts of up to half a percentage point to clients if they bring more of their business to the brokerage or the bank. According to Barron’s “Merrill is testing the rate reductions in California, Oregon, Washington, New York, New Jersey, Connecticut and Florida. The 50-basis-point reduction is available to clients with $500,000 in deposits or investments to qualify for the half a percent mortgage reduction.”

FINSUM: This could be a considerable competitive advantage for luring clients away from other brokerages. We expect Wells Fargo will follow suit, but it will be harder for Morgan Stanley and UBS to do so.

(New York)

Goldman Sachs is launching an interesting suite of new ETFs to help investors gain exposure to emerging areas of technology. The bank’s new offerings include ETFs for human genome research and robotic surgery. In total, the firm launched five new ETFs driven by a strategic partner specializing in calculating companies’ thematic beta. The other ETFs cover innovative financial, data, and manufacturing companies.

FINSUM: This could be an interesting small allocation to portfolios. Some clients are very hot on these new technologies and this might be a nice liquid way to access them. Fees are 50 basis points.

(New York)

Bond investors are getting nervous, and not about the Fed or interest rates. Rather, they are worried about corporate credit. Most will be aware that corporate credit issuance surged over the last decade, especially in fringe investment grade BBB debt. Now, investors are fearing a “wall of maturities”. In the next three years, one third of all triple B rated US debt will come due, a huge test for the group of highly indebted companies. Companies will then need to refinance in this much-less-friendly environment. The Bank for International Settlements warns that in the next downturn, many BBB rated bonds will be downgraded to junk, which will cause fire sales.

FINSUM: Our big worry here is that many institutional investors have strict mandates to not hold junk bonds, so if a solid number of companies fall from the BBB level, there will indeed be huge fire sales in credit markets.

(New York)

Small caps are having a great year so far, but there are increasing worries that the good times might not last. The Russell 2000 is outperforming the S&P 500 by 3% (13% vs 10%) this year, but has tumbled in recent days, a troubling sign. What could be driving the losses is that the big gains in price have not corresponding to improving fundamentals. For instance, small cap performance is very tied to purchasing managers index data (PMI), but the rise in price has not been tied to changes in the PMI. Additionally, small cap companies tend to have the most floating rate debt, which puts them at a higher risk of rising rates. They also tend to have much lower credit quality, meaning they are the most susceptible to shifting rates. More than half the debt issued by small companies is rated as junk.

FINSUM: There is no reason to think the bottom is going to fall out here. However, a sense check seems necessary for small cap investors as there are significant risks.

(New York)

With all the newfound reticence of the Fed, one important fact remains—they could hike at any time. The Fed was hawkish for a long time, and as dovish as they have suddenly become, a position shift on rates could be quick. Accordingly, when considering income-focused investments, advisors need to be very mindful about rate risk. One way to earn good income while also hedging against rates is to look at short term bond funds. Zero and short duration bond funds have little to no rate/duration risk, which means they can earn income without the threat of big losses coming from movements in rates and yields. Some funds to consider are the ProShares Interest rate hedge family or the Fidelity Limited Term Bond (FJRLX), the latter of which yields 2.89% and has a duration of 2.4 years.

FINSUM: Short-term yields have come up so much that limited term bond funds now look like a great buy for stable income without so much capital risk.

(New York)

We have been tracking the economy closely looking for signs of the pending recession that everyone is so worried about. Labor market data last week set off a lot of red flags, and now things are on even more unsure footing. New data released shows that inflation rose at just 0.2% in February, representing an annual gain of 1.5% over the last twelve months. The low inflation means the Fed is not rushing, with Fed chief Powell commenting last week “With nothing in the outlook demanding an immediate policy response and particularly given muted inflation pressures, the [Federal Open Market] Committee has adopted a patient, wait-and-see approach to considering any alteration in the stance of policy”.

FINSUM: This just seems like a return to the post-Crisis norm that we have had. Maybe we will fall back into the several year mode where growth was 2% and inflation was 1.5%.