Vanguard celebrated changes in its fixed income leadership during the closing of the stock market at the Nasdaq in New York, and it continues to be a leader in Active Bond ETFs.

 The recently launched Vanguard Core Bond ETF (VCRB) and Vanguard Core-Plus Bond ETF (VPLS), managed by experienced members of the Vanguard Fixed Income Group, have shown strong performance compared to their peers over the past decade. 

With growing demand for active fixed income ETFs, particularly evident in the success of Vanguard Ultra-Short Bond ETF (VUSB), investors are seeking strategies that can adapt to market changes, especially with anticipated rate cuts by the Federal Reserve in 2024. Both VCRB and VPLS offer potential solutions, boasting relatively low expense ratios and providing complementary options to Vanguard's existing fixed income lineup.

Finsum: Rate cuts are a key reason to consider moving your bond ETF exposure to a more active lens in 2024

Buffer ETFs have surged in popularity among financial advisors aiming to placate nervous clients while maintaining their investment positions. Their widespread adoption has led to major expansion, from less than $200 million to $36.7 billion since 2018, according to Morningstar. 

Operating on the defined outcome strategy, buffer ETFs use equity options to mirror benchmark performance while offering downside protection in exchange for an upside cap within specific 12-month life cycles, available monthly or quarterly. 

Jeff Schwartz, president at Markov Processes International, underscores the importance of comprehending the intricacies of these vehicles, given the multitude of variables involved, and that the intricacies around the buffer and cap structure are pivotal. Advisors must carefully consider market conditions when purchasing buffer ETFs at any point during their lifecycle to prevent diluting the intended benefits. 

Finsum: Timing conditions are still important when it comes to buffer ETFs despite their built in protections.

Gary Gensler, the chairman of the Securities and Exchange Commission (SEC), spoke recently at the Investment Adviser Association Compliance Conference. In a Q&A session with reporters, he remarked that there were no current plans to modify or update Reg BI. Instead, the agency’s focus is on ‘examining for and enforcing against’ Reg BI.

In later remarks, he addressed its approach towards predictive data analytics. He believes this is a gray area, and the SEC wants to ensure that there are no conflicts of interest within newer technology that utilize behavioral prompts and nudges. Of course, this topic is even more germane given the increasing use of artificial intelligence (AI) powered applications. 

Gensler wants to ensure that there are no loopholes to bypass the fiduciary rule. Many in the industry contend that this rule is a backdoor expansion of Reg BI and that current regulations were sufficient. 

Previously, Gensler had spoken that the new technology enables practices to micro-target consumers with products and content. While this can help advisors grow their business, he believes this communications channel needs to be regulated as well to ensure that these business interests are not placed above the clients’. 

Finsum: At a recent conference, SEC Chair Gary Gensler pushed back that there was a backdoor expansion of Reg BI due to the predictive analytics rule. The rule mandates that predictive technology that communicates with clients must also follow the fiduciary rule.

While the Federal Reserve has been successful in lowering inflation over the past 21 months, it still remains uncomfortably high. The consumer price index (CPI) peaked at 9.1% in June 2022 and reached 3.1% in its last reading which remains above the Fed’s 2% target.

Equally relevant, many of the disinflationary impulses which drove the rate of inflation lower have subsided, while there are indications of nascent inflationary pressures budding. For markets, the implication is that the status quo prevails with the Federal Reserve holding rates at 5.50% since July of last year.

While bonds enjoyed a decent rally as the Fed moved from hiking to holding steady, volatility remains elevated due to the current uncertainty about inflation and Fed policy. As a result, the bulk of gains in fixed income proved to be fleeting. According to John Hanock, these conditions are ideal for active fixed income as managers will be able to take advantage of inefficiencies and dislocations caused by the current environment.

The firm believes that active managers will be able to outperform by overweighting quality, intermediate-term bonds, and defensive sectors. It also likes mortgage-backed securities (MBS) due to attractive yields without sacrificing quality. In contrast, it wants to underweight cyclical sectors and high-yield bonds given its concerns about a weakening economy in the second-half of the year. 

Finsum: Volatility has risen for fixed income ever since the outlook for inflation and Fed policy have gotten murkier. Here’s why John Hancock believes active fixed income is the ideal way for investors to take advantage of attractive yields. 

Fidelity recently conducted a survey of advisors and found that only 26% currently have exposure to alternative investments. In contrast, 86% of institutional investors have exposure to the asset class. 

The survey also revealed that many advisors are looking for more resources to help them evaluate various alternative offerings before they feel comfortable recommending them to clients. This is despite other surveys showing that many advisors would like to increase allocation to alternatives due to their benefits such as diversification and non-correlated returns. 

Specifically, advisors cited the need for more due diligence on strategies and managers in addition to concerns about liquidity as obstacles to adoption. Many also indicated the difficulty of communicating with clients about these products given the number of options and complexities.

Adding to the challenge is that each clients’ appropriate exposure to alternatives depends on factors like time horizon, liquidity needs, and eligibility. This level of customization increases the burden on advisors to understand various options in a comprehensive manner. 

In order to address these problems, Fidelity is expanding research on various alternative investment strategies. Initially, the research will focus on private credit, private real assets, and private equity funds. According to the company, these types of tools and resources will accelerate adoption of alternatives by advisors. 

Finsum: A recent survey by Fidelity showed that many advisors have been slow to adopt alternatives. A primary reason is that advisors have a need for more due diligence on the various products and strategies before they feel comfortable recommending them to clients.