Displaying items by tag: vanguard
In 2023, yields started where they ended, although there was considerable volatility in between. Notably, yields dropped sharply following the collapse of Silicon Valley Bank in the spring amid concerns that it would spark a greater crisis. And, yields spiked in autumn with the 10-year Treasury yield exceeding 5% following an uptick in inflation.
In hindsight, this marked the bottom for fixed income as the Bloomberg U.S. Aggregate Index gained nearly 10% between the end of October and the new year. Looking ahead, Vanguard believes this strong performance will continue in 2024.
In terms of its outlook, it sees inflation ending the year just above the Fed’s 2% target. It believes the Fed will ease policy, although they don’t see rates returning to the same lows as the previous cycle. It also sees the yield curve steepening as short-term rates fall further.
The firm also acknowledges some risks to its outlook such as the economy continuing to be bumpy even within the context of a slowdown which could lead to false signals. Credit spreads have remained tight which means that there is greater risk in the event of a recession. High deficits mean that Treasury supply will be plentiful, adding upwards pressure to yields. Finally, inflation could re-ignite especially given geopolitical risks and prevent the Fed from easing even if the economy warranted it.
Finsum: Many active fixed income funds are being launched with a specialized focus on a particular niche. These funds have outperformed amid the volatility in the fixed income market.
With a strong recovery in fixed income over the past couple of months, fixed income fund managers are looking to generate inflows from the nearly $6 trillion that is sitting in money market funds. Some portions will certainly move into fixed income especially if interest rates start to move lower, and investors look to move further out on the curve to take advantage of still attractive yields.
Due to this, active fixed income funds delivered their biggest monthly returns in decades, leading to a surge of inflows. Recent economic data and chatter from FOMC officials have also been supportive of the asset class.
The challenge for managers is the explosion in active fixed income funds over the last few years, leading to price wars for market share and consolidation. Many are from the largest asset managers like Vanguard, State Street, and Blackrock, which have very low costs. Funds that aren’t able to sufficiently attract inflows over this period will only face more difficulties in the future in remaining viable.
According to Rich Kushel, the head of Blackrock’s portfolio management group, “We are in a winner-takes-a-lot moment. If you’re truly adding real alpha, there will always be a place for you in this industry. For the folks who haven’t, you might as well buy [the benchmark].”
Finsum: There is nearly $6 trillion on the sidelines. Some of this will move into fixed income especially if rates start dropping. There will be intense competition among active funds to be a recipient of these inflows.
Vanguard is launching 2 new ETFs giving investors exposure to the municipal bond market. The Vanguard Intermediate-Term Tax-Exempt Bond ETF (VTEI) and the Vanguard California Tax-Exempt Bond ETF (VTEC) launched on the CBOE BZX Exchange and are designed to offer targeted exposure to certain segments of the muni market with an emphasis on quality and yield.
Both also have low expense ratios of 0.08%, making them among the least costly within the muni fixed income category. The intermediate-focused, tax-exempt ETF is particularly timely given expectations that interest rates will decline in 2024 due to a dovish Fed and weakening economic outlook. Thus, many investors are looking to lock in yields at these levels by moving out from the short-end into the intermediate and longer-end of the curve.
In addition to quality and generous yields, municipal bonds also have tax benefits. While VTEI is designed to appeal to a wider swathe of investors, VTEC is for investors who want exposure to California municipal debt. The yield generated from this ETF is tax exempt at the federal and state level for California residents while also prioritizing credit quality.
Finsum: Vanguard is launching 2 intermediate-term, municipal bond ETFs that offer investors tax benefits in addition to income and quality.
According to a survey conducted of attendees at the VettaFi Income Strategy Symposium, 60% are looking to add fixed income ETF exposure from cash and/or equities. This aligns with the view of fund managers on the panel who also believe that the Federal Reserve is near the end of its hiking cycle.
John Croke, Vanguard’s head of active fixed income product strategy, commented that this is a good time to invest in fixed income. He sees the economy heading for a mild recession in the middle of the year despite the better than expected, recent Q3 GDP figures. He agreed with attendees that the hiking cycle is in its final innings and believes that the Fed funds rate will be closer to 4% rather than 5%.
For investors looking to up their fixed income exposure, he recommends an ETF such as the Vanguard Total Bond Market ETF (BND). BND offers exposure to a diversified basket of investment-grade, US debt. He also recommends the Vanguard Ultra-Short Bond ETF (VUSB) for investors looking to exchange cash for bonds. VUSB is composed of a diversified basket of high-quality and medium-quality bonds with an average maturity between 0 and 2 years.
Finsum: According to a survey of attendees at the VettaFi Strategic Income Symposium, 60% of advisors are looking to increase their fixed income ETF allocation in 2024.
Allworth Financial manages $19 billion in client assets. Recently, Allworth CIO Andy Stout shared the firm’s approach to managing model portfolios for clients. The firm has a scorecard in which it quantitatively evaluates all investable mutual funds and ETFs. It follows up by having conversations with managers of funds with high marks to see if their process is ‘repeatable’ prior to investing.
Allworth’s core portfolio is a 60/40 mix between equities and bonds, respectively. The equities side is composed of 48% US stocks and 12% international. The fixed income side is a combination of short-term fixed income funds, investment grade, total return funds, and a handful of active funds.
Allworth believes in spreading allocations between multiple asset managers. For instance in its core portfolio, they use SPDR, Vanguard, Blackrock, and JPMorgan. When it comes to fund selection, the firm looks for securities that are equipped to navigate the entire business cycle. Stout also noted that consistency is valued more since success is more about ‘avoiding strikeouts’ than hitting a home run. In terms of risks, he sees recession risk as remaining elevated and thus favors more defensive sectors and investments.
Finsum: Allworth Financial CIO Andy Stout shared the firm’s approach to model portfolios, and what opportunities and risks he sees at the moment.