Displaying items by tag: fixed income

Strive Asset Management, an upstart competitor to Blackrock and Vanguard, is launching its first fixed income ETFs. Strive is based in Ohio and was founded in 2022 by Vivek Ramaswamy who is now running for President in the Republican Primary. Ramaswamy resigned from the firm earlier this year to focus on his political ambitions, but Strive’s mission and his political campaign clearly have some overlap.

Ramaswamy and Strive are both defined by their opposition to ESG investing and believe that it’s a detriment to investors and the country. Therefore, he’s been critical of asset managers like Blackrock and Vanguard who use their passive stakes in companies to encourage management teams to consider ESG factors when making decisions.

In contrast, Strive and Ramaswamy believe that companies should focus on maximizing profits rather than other factors. Its first 2 fixed income ETFs are the Strive Enhanced Income Short Maturity ETF (STXT) and the Strive Total Return Bond ETF (BUXX). STXT provides total exposure to fixed income with a cost basis of 49 basis points, while BUXX is designed to generate yield for investors by investing in short-duration bonds and charges 25 basis points.

Finsum: Strive Asset Management is launching its first 2 fixed income ETFs. The company differentiates itself by eschewing ESG and rewarding companies that don’t use these metrics.

In a strategy note, Scott Solomon and Quentin Fitzsimmons, the portfolio managers of the Dynamic Global Bond Fund, discuss why active fixed income is the best asset class for the current market environment. Despite recent economic data which indicates that inflation and the economy are both more resilient than previously expected, the pair believe that we are in the midst of a shift from one monetary regime to another.

However, they acknowledge that this is not going to be a smooth process. In fact, they expect a bumpy process especially given investor positioning. But, this uncertainty is what they believe will create opportunities in terms of credit quality and duration. Of course, such opportunities can be taken advantage of better by active fixed income managers rather than passive funds which are tracking benchmarks and unable to invest in securities of varying quality and duration.

Soloman and Fitzsimmons see a new ‘normal’ and expect rates to be structurally higher over the next couple of decades given high levels of debt to GDP in developed countries all over the world. Additionally, they anticipate that the negative correlation between stocks and bonds which prevailed in the years between the 2008 financial crisis and the pandemic is unlikely to return as long as central banks are not actively supporting markets. 

Finsum: Scott Solomon and Quentin Fitzsimmons of T. Rowe Price’s Dynamic Global Bond Fund shared their thinking about why they expect active fixed income to offer the best opportunities in the coming years.

July saw a slowing of inflows into fixed income ETFs, while inflows into equity ETFs ramped higher. $17 billion flowed into bond ETFs which was dwarfed by the $43 billion of inflows into equity ETFs. For the month, the 3 most popular fixed income ETFs were the iShares Core US Aggregate Bond ETF, the Vanguard Total Bond Market ETF, and the iShares 20+Year Treasury Bond ETF. 

This isn’t totally surprising given the poor performance of bonds in recent months due to a surprisingly resilient US economy which is leading to increased odds of more hikes and higher rates for longer and decreased odds of a Fed rate cut and continued cooling of inflation. In contrast, equity markets have been on fire with the S&P 500 now closing in on it's all-time highs from January 2022 while many tech stocks and indices are already at new highs. 

Overall in 2023, the share of inflows has been pretty balanced between fixed income and equity ETFs which is a new development as typically equity ETF inflows dominate. This is largely due to investors wanting to take advantage of higher yields and advisors and institutions becoming more comfortable with fixed income ETFs. 

Finsum: There was a slowdown of inflows into fixed income ETFs in July due to increasing volatility and more uncertainty about the Fed’s rate hike path.

In 2022, active ETFs accounted for 15% of total global inflows into ETFs. In 2023, active ETFs now account for 25% of total inflows. 

Is this a temporary blip due to the current environment of economic uncertainty and high rates and inflation? Or, is this a new trend that we should expect to continue for the foreseeable future.

In a recent report, State Street supports the latter argument. The asset manager sees recent regulatory reform as a major catalyst for growth in the active sector. Rule 6c-11 modernized the process to launch ETF, shortening the runway from many years to 60 days. This has resulted in an explosion of ETF offerings. In the last 3 years, 750 active ETFs have been created, while only 325 were created in the 11 years prior to Rule 6c-11. 

Another regulatory change is that ETF providers are able to be slightly less transparent with their holdings. This has led many managers to launch their own ETFs who were previously concerned about giving their best ideas for free. And, it’s also led many mutual funds to also offer active ETFs with similar strategies. 

It’s particularly bullish on active fixed income ETFs as it sees more room for innovation in the space. And, it notes that many advisors and institutions are just becoming familiar with the asset class.

Finsum: Active fixed income and equity ETFs are seeing incredible growth over the last couple of years due to a combination of regulatory changes and innovation. 

There are many ways for investors to buy Treasuries, but the increasingly popular option is through the iShares 20 Plus Year Treasury Bond ETF (TLT) which is a blend of 10-year and 30-year Treasuries. Currently, this fixed income ETF offers a yield of 3% and is down 2% YTD.

The ETF has been hammered in recent sessions due to Fitch’s downgrade of US debt, larger than expected budget deficits, and rates that are likely to stay elevated at least into Q1 of next year. Another potential reason for TLT’s poor performance in recent sessions is that Pershing Square Capital Management founder Bill Ackman unveiled a bet against TLT and long-duration Treasuries. 

Ackman shared his reasoning on Twitter. He believes that ‘structural’ changes in the world such as the re-shoring of supply chains, an increase in defense spending, electrification of the energy sector, aging demographics, and a tight labor market are indicators that inflation is going to remain high for a meaningfully long period of time. 

Based on this, he believes that long-term Treasuries will need to offer higher yields to lure investors, while they remain currently priced as if inflation is transitory given the 30-year’s current yield of 4.2% inflation. He believes that it should be yielding between 5.5% and 6% given his expectations of inflation, implying losses between 31% and 43%. 

Finsum: Bill Ackman is one of the most successful investors of his generation. Recently, he unveiled a short position against long Treasuries and TLT, one of the most popular fixed income ETFs.