Displaying items by tag: ETFs

The strong demand for bonds this year has led to a windfall for BlackRock’s fixed-income exchange-traded funds. The fund giant has attracted more investor cash since U.S. rates started rising than all of its competitors combined. The inflows to fixed-income funds are being driven by regulatory changes and creative uses by wealth managers and other bond funds. Deborah Fuhr, the founder of the ETFGI consultancy, told FinancialTimes that “There have been significant changes about the way people think about fixed-income ETFs in the past year. We have seen large funds and asset managers put their portfolios in ETFs . . . rather than buying bonds and trying to manage them themselves.” Salim Ramji, BlackRock’s global head of ETF and index investments added, “We’re finding and expanding into all parts of the bond market in multiple different slices . . . Any part of the bond market that can be accessed through an ETF, we’re capturing that.” This includes ETFs such as IBTG, which only holds U.S. Treasury bonds maturing in 2026. Another fund is LQDB, which purely contains BBB-rated corporate bonds. These ETFs allow active fund managers to use them in different ways. For instance, some use a specific slice to tilt their portfolio either to longer or shorter-duration bonds, which depends on their view of the economy. Ramji also noted that BlackRock ETF users include nine of the ten largest active managers and eight of the ten largest U.S. insurance companies.

Finsum:As demand for fixed income increases, Blackrock has created ETFs that track a small slice of the bond market that active managers can use in a variety of ways.

Several fund firms are looking to expand their fixed-income product lines to take advantage of the growing interest in the asset class. Fixed income had experienced a couple of turbulent years as the Federal Reserve's rate increases impacted yields and made equities more volatile. Plus, actively managed fixed-income mutual funds experienced one of their worst years on record in terms of outflows. However, the demand for fixed income this year appears to be gaining steam with several firms positioning themselves to take advantage of this trend. For instance, BlackRock has been rolling out new products to meet fixed-income demand. In January, the firm launched the BlackRock AAA CLO ETF, which has already taken in more than $30 million in assets as of Feb. 21st. Plus, last year, BlackRock launched a first-of-its-kind series of fixed-income ETFs that are designed to provide access to buy-write investment strategies on baskets of fixed-income securities. According to Steve Laipply, U.S. head of iShares Fixed Income at BlackRock, “The theme here is building out different tools for investors to navigate the environment so you continue to see this floating rate theme across the credit spectrum.” The firm is eyeing additional products in the future. Laipply also added that the industry will begin to get more creative when it comes to rolling out new products in the fixed-income space.

Finsum:After a couple of turbulent years, fixed-income funds are seeing increased demand, leading fund firms to take advantage of the trend by launching new products.

While fixed-income ETFs are seeing strong inflows this year, academics from a trio of U.S. business schools suggest fixed-income ETFs can suck the liquidity out of corporate bonds during times of market stress. According to them, the potential problem stems from the creation and redemption baskets that ETF issuers trade with market makers, known as authorized participants (APs), to handle inflows or outflows from their ETFs. Unlike equity ETFs, bond funds’ creation and redemption baskets typically do not include every bond in the index they are tracking as this could include hundreds or even thousands of separate issues. In their paper, Steering a Ship in Illiquid Waters: Active Management of Passive Funds, the academics argue that in normal times a bond’s inclusion in an ETF basket makes the bond more liquid. This is due to a random mix of creations and redemptions increasing trading activity. But, during a crisis, when many investors are running for the exits, redemptions hugely outweigh creations. When that happens, if a bond is included in the basket, the APs “may then become reluctant to purchase more of the same bonds, reducing their liquidity,” according to the paper. However, other bond strategists disagree, including Dan Izzo, chief executive of GHCO, an ETF market maker. Izzo, who argues that the rise of ETFs had actually increased liquidity during periods of market stress, stated that “The causality ran in the opposite direction — it is because some bonds are illiquid that they increasingly feature in redemption baskets as sell-offs intensify, not vice versa.”

Finsum:While fixed-income ETFs continue to see strong inflows, a trio of academics argues that bond funds make the market less liquid during periods of stress.

White-label exchange-traded fund provider HANetf recently launched a range of model portfolios allocating to both in-house and third-party products. The portfolios were launched in collaboration with London-based financial technology firm Algo-Chain. The six portfolios are targeted at financial advisors, wealth managers, private banks, execution-only brokers, robo-advisors, and other money managers who offer ETF portfolios to their clients. HANetf’s balanced, growth, and adventurous model portfolios use ETFs to provide exposure to equities, fixed income, commodities, and alternative assets. Each portfolio provides a different asset allocation, different risk levels, target volatility, and target maximum drawdown. The firm’s ESG growth portfolio is a multi-asset portfolio that invests in impact investing and ESG-themed ETFs. According to HANetf, third-party ETFs are used where appropriate for the first four portfolios. The Future Trends Themed Equity and Digital Assets and Crypto ETP portfolios, on the other hand, allocate exclusively to HANetf funds. The Future Trends Themed Equity portfolio seeks to invest in ETFs that have exposure to the latest megatrends and themes, while the Digital Assets and Crypto model invests in exchange-traded products that give exposure to some of the largest cryptocurrencies, and an ETF with exposure to the blockchain and digital assets sector.

Finsum:White-label ETF provider HANetf launched six model portfolios, including balanced, growth, adventurous, ESG, future trends, and crypto portfolios.

While direct indexing is expected to see wider engagement this year, it isn’t ready to take over the wealth management industry quite yet. That is according to Anton Honikman, CEO of MyVest, who stated “I’m not necessarily of the view that 2023 will be the year that direct indexing becomes broadly democratized. There’s a different discussion about bringing direct indexing to a broader market. What’s hindering that is the need for more of an experience with direct indexing.” Honikman says the necessary building blocks for direct indexing are in place such as access to fractional shares, commission-free trading, and portfolio management technology capable of handling the nuances of direct indexing. However, the technology to unlock its full potential is not in place, according to Honikman. That technology would enable the “true personalization” of financial plans and portfolios at scale. For now, Honikman believes that it makes more economic sense for firms to serve down-market clients with the next best alternative: low-cost, tax-efficient, ETF-based portfolios. Honikman says 2023 will be a year that technologists and wealth management firms continue to invest in personalization by focusing on building the onboarding experience and the data collection, management, and reporting capabilities that will eventually enable direct indexing.

Finsum:Anton Honikman, CEO of wealthtech firm MyVest, believes that direct indexing isn’t ready to take over the wealth management industry until technology such as data collection and reporting that would enable the “true personalization” of portfolios is put in place.