WisdomTree has partnered with Trading 212 to introduce six ETF model portfolios, allowing UK and European retail investors to access pre-built core and thematic portfolios through the Trading 212 app.
The three core portfolios—Conservative, Moderate, and Aggressive—offer diversified exposure to equities, bonds, and commodities. Additionally, investors can choose from Multi-Thematic, Tech, and Environmental thematic portfolios.
This collaboration aims to simplify portfolio building for retail investors by leveraging WisdomTree's institutional expertise to help meet long-term investment goals. Trading 212 manages £4bn in client assets with 3 million funded accounts.
Finsum: Thematic models might be a way to get into technology as it’s poised to rally with interest rates settled or about to be cut.
Bond investors should closely monitor their allocation and management strategies, given the current favorable real Treasury bond yields above 2% and even higher yields on investment-grade bonds.
Bonds are now competitive with other asset classes, a situation not seen in decades due to historically low central bank policy rates. Despite this, many investors continue to neglect their bond allocations, possibly due to poor returns over the past decade. Passive bond index funds and ETFs, like the Vanguard Total Bond Market II Index Fund and iShares Core U.S.
Aggregate Bond ETF, have gained popularity but may not align with all investors' objectives. Active bond management, which can better match investment goals and risk tolerance, often outperforms passive strategies even after fees. Investors should consider a more active approach to bond investing to optimize their portfolio performance and risk management.
Finsum: A rate cut seems more likely given the economic outlook and investors should plan accordingly
Direct indexing allows investors to access the individual stocks in their portfolio, providing opportunities for tax-loss harvesting. Unlike index funds, direct indexing offers the performance and diversification benefits of an index but with the ability to customize holdings.
This strategy enables investors to manage exposure to specific companies or sectors and capitalize on market dips for tax-loss opportunities. While index funds offer simplicity and tax efficiency, direct indexing takes these benefits a step further by allowing more personalized portfolio adjustments.
However, setting up a direct indexing account can be costly and involves higher fees due to its active management. Despite this, the customization and tax benefits can be worthwhile for certain investors, especially those in higher tax brackets or with concentrated stock positions.
Finsum: With fees and minimums getting lower and lower, direct indexing is becoming an option for a wider audience.
Vanguard’s low-cost ETFs are immensely popular, with options like Vanguard Total Stock Market ETF and Vanguard S&P 500 ETF leading the pack. However, there are other notablev ETFs that can enhance your portfolio if you venture beyond these well-known choices:
VBR, a Gold-rated ETF, focuses on small-cap value stocks and charges an exceptionally low 0.07% expense ratio. This ETF has consistently outperformed its category peers, despite small-cap value funds being out of favor for many years.
BNDX, a Silver-rated ETF, offers exposure to the global bond market, complementing a U.S.-heavy bond allocation. It invests in a diverse portfolio of foreign investment-grade bonds, hedging against currency risk, with an equally low expense ratio of 0.07%.
Finally, VT provides exposure to nearly 10,000 stocks worldwide, including U.S., foreign, and emerging markets, making it one of the broadest stock ETFs available. With its diverse mix, it can serve as a comprehensive, standalone stock investment for long-term portfolios.
Finsum: The last one to consider might be a momentum fund as interest rates drop and growth picks up.
ETFs have been on an ultra-high growth trajectory for over a decade now but at least part of that is being fueled by model portfolios. According to a Cerulli Associates report, ETFs are becoming a fundamental part of models. Asset managers and third-party strategist model providers now allocate about 54% to ETFs.
Despite only 12% of financial adviser assets being held in practices primarily using model portfolios, Cerulli estimates that 24% are "model portfolio targets," reflecting client-specific customizations. BlackRock leads as the largest model provider with $84.3 billion in model assets, followed by Capital Group with $75.4 billion.
ETFs have surpassed mutual fund assets within models, and the trend is expected to continue as more products reach their three- and five-year track records, according to Matt Apkarian of Cerulli. The report also highlights the trend towards customization within models, combining ETFs with separately managed accounts to meet individual client needs.
Finsum: Technology augments the current financial offerings to ultimately drive innovation.
Active ETFs have surged in popularity, dominating new launches, inflows, and headlines in the ETF market. At the 2024 Morningstar Investment Conference, industry experts discussed how active ETFs are reshaping the investment landscape.
Nicole Hunter from Dimensional Fund Advisors highlighted DFA’s aggressive entry into active ETFs, converting $30 billion from mutual funds and now holding over $140 billion in assets across 38 active ETFs. T. Rowe Price noted that although active ETFs account for only 5% of ETF assets, they represent 70% of recent launches.
Despite their growth, active ETFs also face a high closure rate, with over 100 shutting down last year. The panelists discussed the benefits of ETFs, including tax efficiency and transparency, while also acknowledging that traditional mutual funds still have their place in the market.
Finsum: Some volatility is hard to read but both geopolitical and interest rates are relatively easy to capitalize on for active funds.
In the current macroeconomic environment, fixed income investors have numerous options for attaining yield but getting active management is a different story, making the Eaton Vance Total Return Bond ETF (EVTR) particularly noteworthy. This ETF offers core exposure in an actively managed fund at a low cost, which is beneficial as interest rates are expected to stay high before eventually declining.
Active management of the EVTR can provide the necessary flexibility to navigate the uncertainties of the bond market, especially with the volatility that has persisted into 2024. The fund's benchmark, the Bloomberg U.S. Aggregate Index, ensures a diversified mix of over 500 holdings, including safe haven Treasuries and higher-yielding bonds.
Investors benefit from an attractive expense ratio of 0.39% and a 30-day SEC yield of 5.17%. The EVTR provides a comprehensive solution for core bond exposure or as a complement to existing bond portfolios, leveraging the expertise of Eaton Vance’s fixed income team.
Finsum: Typically, cost is the main concern with active management, but a cheap active exposure could be the goldilocks solution.
The total value of buyout deals in PE is projected to reach $521 billion by year-end, an 18% increase over 2023, driven by larger transaction sizes. However, divestitures are stagnating, leaving funds with aging assets and prompting investors to seek higher returns.
The 10 largest buyout funds have raised 64% of the total capital, while one in five smaller funds remain below their fundraising targets. Bain & Company's Private Equity Midyear Report highlights that the sector has raised $422 billion by mid-May 2024, with buyout funds leading at $199 billion.
Despite a slight decline in fundraising overall, the report notes a historical low in activity volume, with significant dry powder yet to be deployed. Additionally, the report foresees stable growth in divestitures, but 2024 could still be one of the lowest years for exits since 2016.
Finsum: Privates could begin to slide as rates normalize and people look to traditional products, but we are a little far from that happening.
PGIM, the investment management arm of Prudential Financial, launched two new laddered funds of buffer ETFs: the PGIM Laddered Fund of Buffer 12 ETF (BUFP) and the PGIM Laddered Fund of Buffer 20 ETF (PBFR) on the Cboe BZX. These ETFs offer U.S. large-cap equity exposure with limited downside protection and an upside cap on appreciation.
BUFP invests equally in 12 PGIM U.S. Large-Cap Buffer 12 ETFs, while PBFR invests in 12 PGIM U.S. Large-Cap Buffer 20 ETFs. These funds, the lowest-cost buffer ETFs in the market with a 0.50% net expense ratio, aim to help investors navigate market volatility.
Buffer ETFs provide the advantage of downside protection during market declines but come with the disadvantage of capped gains during market rallies.
Finsum: Lowering the costs of buffer ETFs could be wildly beneficial particularly when they seem so well poised for our current environment.
Artificial intelligence is becoming crucial in financial advisory operations, automating tasks and enhancing efficiency. This allows advisors to focus more on client interaction and strategic work.
AI leverages big data and advanced analytics to identify patterns, detect market trends, and anticipate client needs with greater precision. Consequently, clients receive more personalized advice and recommendations.
Additionally, integrating various financial technologies enhances client engagement and produces better outcomes. The rise of open architecture ecosystems enables the integration of best-of-breed solutions tailored to a firm’s specific needs.
Finsum: AI tools can be used for simpler tasks like client outreach and personalization but also for more advanced tasks like portfolio construction.
More...
The first five months of 2024 have featured above-average volatility for fixed income due to inflation continuing to run hot and increased uncertainty about the Fed’s next move. Despite these headwinds, institutional investors have been increasing their allocations to long-duration Treasuries and high-quality, corporate bonds.
One factor is that there is increasing confidence that inflation and the economy will cool in the second half of the year, following a string of soft data. As a result, allocators seem comfortable adding long-duration bonds to lock in yields at these levels. Many seem intent on front-running the rally in fixed income that would be triggered by the prospect of Fed dovishness. According to Gershon Distenfeld of AllianceBernstein, “History shows pretty consistently that yields rally hard starting three to four months before the Fed actually starts cutting.”
For investors who believe in this thesis, Vanguard has three long-duration bond ETFs. The Vanguard Long-Term Bond ETF is composed of US government, investment-grade corporate, and investment-grade international bonds with maturities greater than 10 years. For those who prefer sticking solely to bonds, the Vanguard Long-Term Treasury ETF tracks the Bloomberg US Long Treasury Bond Index, which is composed of bonds with maturities greater than 10 years old.
Many allocators are adding duration exposure via high-quality corporates given higher yields vs. Treasuries. These borrowers would also benefit from rate cuts, which would reduce financing costs and boost margins. The Vanguard Long-Term Corporate Bond ETF tracks the Bloomberg US 10+ Year Corporate Bond Index, which is comprised of US investment-grade, fixed-rate debt issued by industrial, financial, and utilities with maturities greater than 10 years.
Finsum: Interest is starting to pick up in long-duration bonds following softer than expected economic and inflation data, which is leading to more optimism that the Fed will cut rates later this year.
According to Lindsay Rosner, the managing director of multi-sector fixed income investments at Goldman Sachs, fixed income is presenting investors with an attractive opportunity to lock in high yields without compromising on quality. There are some challenges given divergences in central bank policy around the world and increasing uncertainty about the timing and direction of the Fed’s next move. Overall, the firm believes that the status quo of ‘higher for longer’ is likely to prevail.
A major factor is inflation, and the economy proving to be more resilient than expected. As a result, the market is now expecting two quarter-point rate cuts before the end of the year, compared to expectations of 150 basis points in cuts entering the year. The next Fed decision is on July 29. Prior to that meeting, there will be considerable amounts of inflation and labor market data, which could impact its thinking, although the current expectation is for it to hold rates steady.
With rates at these levels, there is increased risk that consumer spending is affected or that a higher cost of capital begins to impact corporate profitability and hiring. This risk increases the attractiveness of fixed income, especially as many investors are looking to rebalance given strong equity performance. Rosner sees opportunity in higher-quality areas such as investment-grade corporate bonds and structured products with AAA or AA ratings, especially given an impressive carry differential over Treasuries.
Finsum: Goldman Sachs sees opportunity in higher-quality segments of the fixed-income market. It believes investors should lock in yields at these levels, given the risk that high rates will eventually sour the economic outlook.
In the past two years, retirement investors have funneled over $20 billion into US exchange-traded funds (ETFs) that limit both gains and losses, challenging traditional insurance products. These "buffered" ETFs capitalize on derivatives to cushion the effects of extreme market swings and have grown popular since their 2018 debut, especially after the market turbulence of 2020 and 2022.
The draw of buffered ETFs lies in their downside protection, which has become increasingly attractive to investors seeking to safeguard their retirement savings. Financial advisers in the US have embraced these ETFs, driving $10 billion in net inflows in both 2022 and 2023, while taking market share from the $3.3 trillion annuities market and costly structured notes.
This has grown not only the size but the scope of the market with 200+ defined outcome ETFs in the US, totally a staggering $37bn. In turn new competitors like BlackRock and AllianceBernstein are joining the competition to try and capitalize on the gains from First Trust and Allianz.
Finsum: The uniqueness of buffer ETFs really is in how they integrate derivatives to drive performance and outcomes and can present nearly all in one solutions.
What is the best way to manage a portfolio in an era with less structural disinflation, and how can you improve upon the 60/40 in the current environment
The traditional 60/40 portfolio, consisting of 60% stocks and 40% bonds, has long been a benchmark, balancing growth from stocks with stability from bonds. However, the historical success of this model relies on a period of declining interest rates and favorable economic conditions in the U.S., which may not persist in the future.
As interest rates stop declining and inflation potentially rises, the performance of the 60/40 portfolio is expected to be less impressive, especially during high inflation periods when energy and commodities tend to outperform. To better manage portfolios in this new environment, it’s advisable to diversify beyond the 60/40 mix by including assets like commodities, real estate, and cash equivalents to hedge against inflation and provide more stability during economic shifts.
Finsum: We have seen an increased correlation between stocks and bonds in the most recent years suggesting alternative diversification to manage volatility.