Displaying items by tag: ETFs

2022 was one of the worst years in memory for fixed income amid raging inflation and a hawkish Federal Reserve. Yet, conditions are much more favorable for the asset class in 2023 given a slowing economy and decelerating inflation. In an article for TheStreet’s ETF Focus channel, David Dierking discusses why short-term fixed income ETFs are a compelling option.

While, it’s likely that the Fed is done raising rates for now, the resilient economy and labor market mean that rates are likely to stay ‘higher for longer’. This favors fixed income with shorter maturities as investors can take advantage of high yields.

ALready, we are seeing this manifest as short-term bond ETFs were the recipient of 21% of net bond ETF inflows in Q1, even though they only account for 8% of the fixed income universe by total assets. 

Additionally, many investors treat short-term bond ETFs as a cash equivalent given that they are extremely liquid, while paying generous yields. In fact, Fed policy is essentially encouraging this trade given the extremely inverted yield curve and rally in long-duration fixed income since March of this year. 

Finsum: Short-term fixed income ETFs are seeing major inflows this year and are an intriguing option in the current market environment.

In an article for Bloomberg, Ye Xie and Liz McCormick discussed how Vanguard’s fixed income ETFs have been major recipients of inflows as investors look to take advantage of higher yields and protect their portfolio from a potential recession later this year.

In March, the funds saw $26 billion of inflows due to the crises at Credit Suisse and Silicon Valley Bank. This was nearly more than last year’s cumulative $31 billion of inflows. 

It’s also an indication that Vanguard’s passive management and indexing strategies will take on even greater significance in the fixed income world as these funds keep growing. In total, Vanguard’s fixed income funds have over $1 trillion in assets. 

It also follows what has happened in equity markets, where passive funds have ballooned in size, and make up the bulk of inflows. In hindsight, the 2008 financial crisis and subsequent few years seem to have been the trigger for equity investors favoring passive funds over active ones due to the strong outperformance of indexes. 

Similarly, 2022 was the biggest rout for bonds in decades due to inflation and a hawkish Federal Reserve. This also has led to investors rethinking allocations, and one outcome has been the growth of passive over active. 

Finsum: Similar to what happened in equities over the last decade, passive bond funds are starting to see the bulk of inflows.

In an article for iShares, Karen Veraa CFA discussed the opportunity in fixed income ETFs, following the selloff in bonds last year. She notes that assets migrated to the space as investors wanted to reduce risk in their portfolios while taking advantage of attractive yields. 

Due to the Federal Reserve’s low rate policies over the last decade, bonds were overvalued and offered paltry yields. This contributed to weakness in the asset class in 2022. But, conditions are turning more favorable as inflation has peaked, recession odds are climbing, and Fed fund futures showing increasing chances of a Fed easing cycle commencing sometime in the second-half of the year. 

While the crisis among regional banks is contributing to economic worries, the ‘flight to safety’ into bonds and fixed income ETFs was an indication that the asset class offers diversification benefits. 

Another reason to like fixed income ETFs is that opportunities to earn income are substantially higher. Between 2013 and 2021, the only place to earn more than 4% income was with riskier high-yield and emerging market debt. Now, over 70% of fixed income securities are yielding more than 4%. 

Finsum: Fixed income ETFs are particularly attractive at the moment given increasing economic worries and generous yields across the sector.

In an article for ETFTrends, Ben Hernandez gave some reasons why there is still opportunity for fixed income investors in high-quality bonds, and some ETFs to consider. 2023 has seen a strong rebound for bonds after an abysmal 2022. 

The major factor is that inflation expectations have turned lower, while many see an endpoint to the Fed’s hikes later this year. Additionally, increasing odds of a recession have also resulted in inflows into fixed income ETFs. 

While the Fed is expected to hike one or two more times, this headwind is more than offset by slower economic growth and increasing risk of a credit crunch given the inverted yield curve and damage to the banking system. Another positive for fixed income ETFs is that yields are at their highest level in decades. 

Fixed income investors can take advantage of this favorable backdrop by investing in a  high-quality, short-duration ETFs. One example is the Total Bond Market ETF, which is composed of a variety of government, corporate, mortgage-backed securities, and international bonds. Another option is the Vanguard Short-Term Inflation-Protected Securities Index Fund. This is comprised of short-term, inflation-protected Treasury bonds. 

Finsum: 2023 has featured a strong rebound for fixed income ETFs. The major factors are a slowing economy, ending of the hiking cycle, and cooling inflation.

According to Russell Investments, the outlook for active fixed income looks quite attractive in 2023. They see opportunities to outperform benchmarks due to market and trading inefficiencies, index construction, and a volatile macro environment due to the lack of clarity around the Fed’s hiking schedule.

Compared to active equity funds, they see more opportunity for alpha in active fixed income for a variety of reasons. A major one is that fixed income indices are constructed with thousands of securities, often with different durations, coupons, and covenants. For astute managers, this can create opportunities to uncover value especially amid rating changes, new issues, and rebalancing by indexes. 

Another favorable factor is that many participants in the fixed income market are not focused on maximizing returns. Instead, there are forced buyers of fixed income due to capital requirements like insurance companies and banks. Further, central banks remain active in these markets as well, and they telegraph their intentions well in advance. 

Finally, there are simply more inefficiencies in fixed income as the vast bulk continue to be traded over-the-counter which leads to less price transparency and wider bid-ask spreads. 

Finsum: Russell Investments sees opportunity for investors in active fixed income funds due to more inefficiencies, less transparency, and more opportunities to uncover value..