Displaying items by tag: fixed income
Markets are in turmoil which has investors looking for more secure options, but American bonds are a risky option with rising yields (falling prices), which means active international is in a good position. Over the last year, 82% of active bonds have outperformed, and while that doesn’t hold up in the long run the unique conditions put them in a good position. International bonds can offer less interest rate risk, already better yields, and comparable credit profiles. The added advantage of international active funds is investors can make hedges with currency trading which can allow investors to hedge or leverage for more potential gains.
Finsum: The Fed will continue to put pressure on both bonds and equities in the U.S., and investors need a backup plan.
Most fixed income ETFs used to be linked to passive tracking products in the bond market, that is until more recently. Rules Adopted by the US SEC have steered many investors to active fixed income by making it easier to launch new active ETFs. Active funds are attractive for ETF producers because they draw higher fees (about .2 percent) than active funds. This has led to an explosion in active fixed income. Active bond fund creation is growing at nearly double the rate of the rest of the ETF market, and investors are ready as well as 2021 saw a record pace of inflows. One big factor in shifting more investors into active fixed income is aging global demographics which are still searching for yield and income.
Finsum: The world’s aging population is creating a safe asset shortage and pushing bond prices higher.
February was a bad month for fixed income ETFs which saw $32.2 billion in outflows. This marks the third straight month in a row of outflows. However, fixed income wasn’t the only category suffering in February; many traditional funds like money markets and stock/mixed asset funds saw outflows as well. This is an overall bearish sentiment that is creeping across the market, and signals that investors are worried about future rate hikes for the Fed. However, alternative funds continue to be on a win streak as they had their strongest inflows in over a year and have 11 consecutive months of inflows.
Finsum: There is a stronger correlation with stocks and bonds than there was thirty years ago and many investors are turning away from bond funds in the face of volatility.
2021 was an all-time year for active fixed income launches, and 2022 is looking to continue that pace. Capital Group just debuted another active fixed income ETF to capitalize on this financial trend. The Capital Group Core Plus Income ETF (CGCP) will seek a higher income return for a traditional bond fund and really seek to maximize total return. With a wide swath of debt available in their targets, they can invest over a third in below investment grade securities. This launch comes amid 5 other active equity fund launches for Capital Group. Overall investors are looking for more alpha return in their portfolios and are looking to active management to find it.
Finsum: Macro factors are pushing more investors into active bond funds, with increased interest and inflation risk core analysis is more effective than ever in fixed income.
Inflation and interest rate risks are two of the most prominent risks in the economy, and they are the reason so many are fleeing traditional fixed income. One place many investors are turning is to annuities, but how does interest rate risk affect annuities? For fixed annuities appreciating rates mean investors can get a better payout with the same premium and generally expand the offerings. For variable annuities, it's trickier as they are more tied to equity markets. If the Fed hikes too aggressively and markets respond adversely this could hurt variable rate products but if the stock market stays steady they won’t be under much pressure. As an income value proposition generally they both perform better than bonds in raising rates because higher yields (inflation and interest rates both moving) suppress bond prices directly.
FINSUM: Annuities have a lot of value in rising rates environments as an income product especially compared to government securities and CDs.