Last month, we wrote about a survey that revealed advisors are seeing the importance of active ETFs since owning passive index-only ETFs left them too exposed to market conditions. Another survey was performed this month showing similar results. VettaFi held a webcast called Active Strategies for Rising Rate Headwinds that featured Franco Ditri and Chris Murphy of T. Rowe Price and Todd Rosenbluth of VettaFi talking about the Fed’s monetary policy outlook and how financial advisors can incorporate active strategies into a bond portfolio. After the webcast, a poll was taken revealing that more advisors are seeing the need to add active management to their portfolios, given the likelihood that the Fed will continue to raise rates. The majority of respondents expect to increase their exposure to active ETF strategies, with 50% being “very likely” and 39% saying they are “somewhat likely.” Of those, 39% of respondents said they would most likely consider high-yield/bank loan funds for exposure, with 27% saying they would consider active short-term bond funds. In addition, 20% are contemplating core-plus and 14% are looking toward core bond funds. If the Fed continues its tightening policy, actively managed fixed-income strategies could help reduce risk.
Finsum:A post-webcast poll revealed that more advisors are seeing the importance of active fixed income with the Fed continuing to pursue a tight monetary policy.
While rising interest rates last year battered both stocks and bonds, the rise in rates brought higher yields to the fixed-income market. According to Dow Jones Market Data, the yield on the 10-year Treasury note rose 2.330 percentage points in 2022 to 3.826%, its largest annual gain on record. The two-year Treasury yields surged 3.669 percentage points to 4.399%, while the 30-year yield jumped 2.046 percentage points to end the year at 3.934%. These marked the largest annual increases ever for those notes. The jump in yields drove investors into fixed-income ETFs last year, with BlackRock's iShares dominating inflows. In a phone interview with Morningstar, Salim Ramji, BlackRock's global head of iShares and index investments, stated "We had record flows even in one of the worst fixed-income markets. We were twice the next competitor." Based on data from Morningstar Direct, iShares attracted around $100 billion in 2022, the most among U.S.-listed ETFs that invest in fixed income. Vanguard saw the second biggest fixed-income ETF inflows with around $49 billion, followed by State Street with about $21 billion. The most popular fixed-income ETF based on inflows last year was the iShares 20+ Year Treasury Bond ETF (TLT), which gathered around $15 billion.
Finsum: In an ugly year for fixed-income markets, bond ETFs continued to see strong inflows due to higher yields with Blackrock’s iShares leading the pack.
After a tough year for fixed income, many bond strategists are expecting 2023 to be a great year for bonds. But where should advisors and investors look to invest? In an interview with Yahoo Finance Live, PIMCO Managing Director and Portfolio Manager Sonali Pier offered her perspective on where the sweet spot will be for bonds this year. She believes that despite potential volatility, “there’s a lot of room now for income-producing assets.” She stated, that “a sweet spot may be those Triple Bs within investment grade, for example, where dollar prices have come down a lot as a result of the interest rates rising as well as credit spreads having widened.” In the interview, she also talked about what areas of the corporate bond market to avoid. Her firm is most concerned with areas where there are “low multiples on businesses, low margins, high cyclicality, where it's very difficult to weather a storm like a recession when you have those types of things against you as well as still inflation as an impact.” She mentioned industries such as retail, autos, and wire lines to avoid that are seeing declines due to a “shift in investor demand as well as disruption from the supply chain.”
Finsum:PIMCO portfolio manager Sonali Pier believes that a sweet spot for bonds this year may be triple Bs within investment grade while avoiding industries such as retail, autos, and wire lines.
According to Cerulli Associates' U.S. Exchange-Traded Fund Markets 2022 report, active fixed-income ETFs present a massive opportunity for firms. Daniil Shapiro, a director in product development at Cerulli, said in a recent interview that "a mix of factors" have combined to create the opportunity. He stated, "You have investors that are showing an increased preference for the ETF structure and they're increasingly open to accessing fixed income through the ETF structure. At the same time, you have interest rates that are increasing, which makes fixed income more attractive to investors." The report was based on polling Cerulli conducted in the third and fourth quarters of last year. It revealed that among advisers using ETFs, the portion using U.S. fixed-income ETFs has continued to increase, with 70% reporting such use in 2022, up from 63% in 2021. In addition, when ETF issuers were asked to gauge key drivers of fixed-income ETF flows over the next 24 months, greater adviser familiarity with fixed-income ETFs topped the list, cited by 66% of respondents. The second biggest driver was the increased use of fixed-income ETFs by institutions, which was cited by 55% of respondents.
Finsum:According to a new report by Cerulli Associates, active fixed-income ETFs present a massive opportunity for firms due to investors preferring the ETF structure and fixed income being more attractive with higher rates.
According to a post-viewer poll following a VettaFi active fixed-income webcast, financial advisors seemed to be warming up to having more actively managed bond ETFs in their client’s portfolios. After viewing the webcast Active Fixed-Income Answers to Tight Monetary Policy, half of the respondents said that they are very likely to increase their exposure to active ETF strategies in the future, while 37.5% said they are somewhat likely to do so. The poll also found that "56% said they were concerned that owning passive index-only ETFs left them too exposed to market conditions without forward-looking risk controls or the ability to pivot to make changes, with 44% saying they were ‘very concerned’.” Todd Rosenbluth, head of research at VettaFi had this to say about the results, “With the heightened market volatility of 2022 likely to persist into the new year, advisors are increasingly interested in ETFs where, rather than shifting to a more offensive or defensive stance, they can take advantage of the expertise of managers who can shift exposure based on the latest developments.” With ETF firms launching more actively managed funds amid market volatility and inflation, investors are looking to active management to help guide their portfolios.
Finsum:A recent poll by VettaFi found that more advisors are seeing the importance of active fixed income in their client portfolios.
Institutional investor portfolios are expected to look very different next year. For the first time in years, short-term government bonds are yielding more than 4 percent. This could lead to widespread changes in asset allocation, as investors won't have to allocate as much to equities. When rates were near zero, institutional investors had more stocks in their portfolios than they would have liked as a higher equity allocation brought on more risk. But now that yields are much higher, investors can once again allocate to fixed income. Even CDs are yielding nearly 4 percent. Mike Harris, president of the quantitative manager Quest Partners told Institutional Investor that “When central banks were printing money and forcing rates close to zero…people said, ‘We don’t want any fixed income in the portfolio,’ which is crazy to me. It’s been a building block of traditional portfolios for as long as I can remember. Investors were adamant about finding ‘somewhere else to park that capital,’ even if that meant taking on unwanted risk.” Now that bonds are much more appealing due to the higher yields, Harris expects that there are going to be some significant changes in asset allocation.
Finsum:A rise in yields for low-risk bonds could have major implications for institutional asset allocation next year.
According to the new InspereX 2023 Advisor Outlook Survey, 74% of financial advisors said they expect the inverted yield curve between the 2-year and 10-year Treasuries to continue into the second quarter of 2023. This includes 40% who expect it to last beyond the third quarter. An inverted yield curve occurs when short-term yields are higher than long-term yields. It is also often considered a signal for a recession. InspereX provides advisors, institutional investors, issuers, and risk managers deep access to fixed-income market data across asset classes. The survey was conducted between November 8th and 21st, 2022, among 270 financial advisors by Red Zone Marketing. The respondents represented advisors from independent and regional broker-dealers, banks, and RIAs. InspereX President David Rudd stated, “While many advisors are bullish on stocks in 2023 and optimistic about moderating inflation, their views on a continuation of the inverted Treasury yield curve indicate that the first half of the year could be bumpy.” However, advisors also believe that rising inflation is over, with 75% saying it has peaked. While many advisors say their clients are concerned about fixed-income volatility, they were not too scared to invest in fixed-income right now. In fact, the survey found that 68% of advisors are using individual bonds with their clients, mainly for income (56%) and diversification (23%).
Finsum:A recent survey revealed that advisors are concerned that the inverted yield will continue into next year, indicating the possibility of a recession.
It looks like alternative asset classes are writing a story of their own.
Someone say Kurt Vonnegut’s name written all over them? After all, he always seems to have one trick or another up his literary sleeve.
Its been a never before seen year in the equity and fixed income markets, according to fa-mag.com. Global equities receded close to 20% as of June 30. Meantime, high quality fixed income jetted backwards by around 10%. Historically? Well, it was the darkest start to a year in the bond market since, get this, 1842. Just keeps getting better, eh?
Well, it’s a different ballgame for those asset classes. During the year, the cocktail of real estate, real assets, hedge funds, private equity and private debt nudged aside both equities and fixed income.
Okay, sure, alternative asset classes have caught a little heat for their fees, minimums and illiquidity. This year, however? Well, they’ve larded on a great deal of value. The question: will this trend sustain itself?
A release of its findings earlier this month of its most current Selling Retail Investment Products through Intermediaries Report, based on 810 confidential interviews of U.S.-based financial advisors in September, found a three point jump in the use of alternatives, according to insights.issgovernance.com. It was 39% in Q4 of 2021 to 42% in June of this year.
Inflation? Well, here’s some breaking news – even if CNN’s come to frown upon them lately: it’s still hitting nosebleed levels, according to gsam.com. What’s more, the wider economic environment, and the labor market, especially, has strutted its mettle.
Yeah; wow. Maybe – just maybe – the network will reconsider its spanking new policy.
In any event, it means the central banks will continue to rachet up rates. The question then becomes that since monetary policy impacts the economy with a lag, will they head north too far and quickly. From GSAM’s perspective, market stabilization will demand signs of inflation topping out, not to mention hawkishness and real yields.
”Higher inflation and higher growth volatility are propelling us into a higher yield environment, marking a departure from the post-financial crisis era,’ said Whitney Watson, global head of Fixed Income Portfolio Management, Construction & Risk at Goldman Sachs Asset Management. “Ultimately, we think this presents opportunities in high-quality fixed income assets, such as investment grade corporate bonds and agency MBS.”
Meantime, it seems bonds will be back in vogue with investors next year, according to schwab.com.
And it’s a real change of pace. Following subpar yields stretching years, and in the aftermath of the extremely hard knocks endured by prices in 2022, a bounce back appears to be in store in the fixed income markets.
JPMorgan Asset Management recently announced the upcoming launch of three new fixed-income BetaBuilders ETFs. The funds, which will launch in February, will provide exposure to the aggregate, investment-grade corporate, and high-yield corporate bond markets. All three will be converted from three existing actively managed ETFs. The JPMorgan BetaBuilders US Aggregate Bond ETF (BBAG) will be created from the $1.2 billion JPMorgan US Aggregate Bond ETF (JAGG). The fund, which will come with an expense ratio of 0.03%, will track the Bloomberg US Aggregate Bond Index and invest in Treasury, government-related, corporate, and securitized fixed-rate bonds from issuers worldwide. The JPMorgan BetaBuilders USD Investment Grade Corporate Bond ETF (BBCB) will be converted from the $40 million JPMorgan Corporate Bond Research Enhanced ETF (JIGB). BBCB will track the Bloomberg US Corporate Bond Index, consisting of investment-grade bonds from corporate issuers worldwide. The ETF has an expense ratio of 0.09%. The final ETF, the JPMorgan BetaBuilders USD High Yield Corporate Bond ETF (BBHY), will be created from the $400m JPMorgan High Yield Research Enhanced ETF (JPHY). BBHY will track the ICE BofA US High Yield Total Return Index, covering sub-investment-grade, corporate bonds issued in the US market. The fund has a slightly higher expense ratio of 0.15%
Finsum:JPMorgan adds to its suite of BetaBuilders ETFs with the upcoming launch of aggregate, investment-grade corporate, and high-yield corporate bond ETFs.
There is no doubt that government bond and corporate debt markets have taken a beating this year due to inflation and rising interest rates. But that may change next year if two fixed-income strategists are correct. On Tuesday, Gurpreet Gill, macro strategist, global fixed income at Goldman Sachs Asset Management said that “The year ahead is shaping up as the most promising for fixed income in over a decade.” While speaking at the Edelman Smithfield Investor Summit in London, Gill noted that valuations in fixed-income markets were looking more appealing than they were a year ago. This included emerging markets and corporate bonds. She stated, "We think it makes sense to be in high-quality short-duration assets, in agency mortgage-backed securities markets in the U.S." Gill isn’t alone in those thoughts. Sara Devereux, global head of Vanguard Fixed Income Group, said last Friday that “The recent debt rally brought the chance to reduce credit exposure and buy mortgage agency securities based on valuations, setting up what promises to be a bond picker’s paradise in the new year.”
Finsum:Two fixed-income strategists expect next year to be a great year for bond pickers due to lower valuations.
Invesco continues to expand its ETF lineup with the launch of four new actively managed ETFs. The new fund offerings include the Invesco AAA CLO Floating Rate Note ETF (ICLO), the Invesco High Yield Select ETF (HIYS), the Invesco Municipal Strategic Income ETF (IMSI), and the Invesco Short Duration Bond ETF (ISDB). All four funds were launched last Friday and trade on the CBOE. ICLO, which has an expense ratio of 0.26%, invests in floating-rate note securities issued by collateralized loan obligations (CLOs) that are rated AAA or equivalent. HIYS invests in higher quality below investment grade fixed income securities, such as corporate bonds and convertible securities. The fund charges 0.48%. IMSI has an expense ratio of 0.39% and invests in municipal securities exempt from federal income taxes and in other instruments that have similar economic characteristics. ISDB invests in fixed-income securities such as high-yield bonds and other similar instruments and aims to maintain a portfolio maturity and duration between one and three years. The ETF charges 0.35%.
Finsum:Invesco bolsters its active stable of ETFs with the launch of four fixed-income ETFs that invest in CLOs, high-yield bonds, munis, and short-duration bonds.
Tidal Financial Group recently announced the launch of the Senior Secured Credit Opportunities ETF (SECD), its first actively managed credit ETF. The fund, which is managed by Gateway Credit Partners seeks to generate consistent income and preserve capital by investing in a combination of first-lien senior secured loans and secured bonds to businesses operating in North America. Gateway is a value-based credit manager that focuses on capturing fundamental and technical inefficiencies in the leveraged loan and high-yield bond market. The firm focuses on generating true alpha which they define as yield per turn of leverage significantly greater than their representative indices. It believes a “size arbitrage” exists in credit markets as rating agency models can over-emphasize size vs credit fundamentals. Tim Gramatovich founder of Gateway had this to say about the ETF launch, “At over $3 trillion, the US loan and high-yield bond markets offer investors a tremendous opportunity to generate yield. We believe SECD fills a much-needed gap in the actively managed corporate credit space particularly as it relates to the loan market.”
Finsum:Tidal Financial Group recently launched an actively managed credit ETF that aims to take advantage of higher yields in the loan market.
With bond mutual funds experiencing record losses this year, many investors are headed for the exit. But most are not leaving fixed income altogether, they’re just swapping mutual funds for ETFs. The main reason is taxes. Many investors are selling positions in bond funds and putting the cash into similar ETFs to harvest tax losses. According to The Wall Street Journal, “This year is shaping up to be the biggest 'wrapper swap' on record.” About $454 billion has been pulled from bond mutual funds, while $157 billion has flowed into bond ETFs through the end of October. According to macro research firm Strategas, it would be the largest net annual swap to ETFs by a wide margin.” Todd Sohn, ETF strategist at Strategas stated, “The Fed is at its most aggressive in 40 years. Along with inflation, that has absolutely crushed bonds. It’s set off the acceleration of wrapper swapping that we have seen in equities for a while. Now we’re finally getting it in bonds.” Many of these swappers are also taking their money out of mutual funds that hold riskier bonds and putting them into safer Treasury ETFs.
Finsum:With the bond market experiencing its worst year since 1975, bond investors are trading mutual funds for ETFs at a record pace.