Displaying items by tag: active etfs

In a recent Bloomberg article, Katherine Greenfield discussed the growing popularity of triple-leveraged bond ETFs. It’s somewhat surprising given that the bond market is coming off its most volatile year in 2022 in decades given the challenges posed by rising rates and sky-high inflation. 

Further, bond investors tend to be more conservative and favor the asset class, because it is less volatile than equities. Similarly, there has been an uptick on call and put buying on fixed income ETFs as well. To compare, there were 827,000 contracts traded on the iShares 20+Year Treasury Bond ETF in 2013, while there have been more than 2.2 million contracts traded on the same ETF this year.  

Overall, there are 15 leveraged fixed income ETFs, listed in the US. Total assets have climbed to $3.5 billion with the largest being the 20-Year Treasury Bull 3x which provides exposure to longer-term Treasuries and uses derivatives to track its underlying index. So far, this ETF has already seen $720 million in inflows, nearly eclipsing last year’s total of $783 million. According to Greenfield, the inflows into leveraged fixed income ETFs are likely due to retail traders, while the spike in options activity can be attributed to institutional investors.

Finsum: Leveraged fixed income ETFs are experiencing massive inflows, while options activity on fixed income ETFs is also soaring. . 

In an article for John Hancock Investment Management, Steve Deroin, the Head of Asset Allocation Models and ETF Strategy, discusses why he believes active fixed income will see a strong decade of growth as it’s uniquely positioned for the current market environment. 

Active ETFs are a small share of the total market, but they are rapidly growing. It provides the benefits of the ETF structure, while being more responsive to a volatile market environment. Currently, active ETFs have 5.3% market share but received 14.4% of net inflows in 2022. Additionally, they accounted for 63% of all new ETFs in 2022 which is the 3rd straight year that active offerings outpaced passive ones. 

In the fixed-income market, active ETFs offer exposure to bonds with more liquidity, transparency, and lower costs. Many passive fixed income ETFs don’t offer exposure to higher-yielding instruments and are instead concentrated in Treasuries and mortgage-backed securities. 

Thus, given these trends and a much more volatile market environment, the active fixed income ETF segment will continue to rapidly grow. 

Finsum: Active fixed-income ETFs are growing faster than passive fixed-income and active equity ETFs. Expect this trend to continue over the next decade.

In an article for CNBC, Sean Conlon discussed some factors behind the rise in demand for fixed income ETFs. Despite some softening in the economy and in terms of inflationary pressures, the Fed seems intent on hiking by another quarter point at its next meeting. 

This is leading to juicy opportunities in the fixed income space which may not last if inflation does continue to trend lower or a recession materializes in the second half of the year. Additionally, current futures markets are forecasting that the Fed will be cutting rates by the end of the year. As noted by Vettafi, this dynamic is leading to inflows into Treasuries, corporate bonds, and high-yield bonds as investors look to lock in duration and yields.

Since the start of the year, there was about $45 billion in inflows into fixed income ETFs. Another factor behind this demand is the underperformance of traditional asset allocation models like 60/40. This is leading many investors to get more conservative and examine the fixed income space for opportunities.Until market stresses ease, demand for fixed income ETFs should remain elevated. 

Finsum: Fixed income ETF demand rose sharply in Q1. Given the Fed’s hawkish bent and current market conditions, this should persist.

After a decade of low rates and abundant central bank liquidity, market conditions are going to be much more challenging over the next decade. According to Jason Xavier, Head of EMEA ETF Capital Markets at Franklin Templeton, these developments mean that a major opportunity is brewing for active fixed income ETFs. He discussed this in a post for Franklin Templeton’s Beyond Bulls & Bears publication.

While most fixed income ETFs are passive, the active category is exploding in response to the need of investors to express various views. In contrast to passive strategies, active ETFs utilize fundamental analysis and have greater discretions on which instruments they can select rather than be limited by an index. Active managers have greater flexibility to respond to a change in market conditions or external catalysts unlike passive managers. 

In the fixed income space, the ETF structure leads to increased price transparency and liquidity especially compared to traditional bond markets which are typically quite opaque. ETFs also give smaller investors access to fixed income opportunities which were typically only available to high net worth investors or institutions. 

In sum, Xavier believes active fixed income ETFs will continue to see growth as they are likely to outperform in more volatile conditions and will lead to increased transparency and liquidity in the fixed income market.

Finsum: Franklin Templeton’s Jason Xavier sees the active fixed income ETF category continuing to rapidly grow as it offers major benefits to investors.

In a recent article for John Hancock’s Recent Viewpoints, Steve L. Deroian, Head of Asset Allocation Models and ETF Strategy offered his take on why active fixed-income ETFs provide value. Deroian noted that while active ETFs have slowly gained traction since they first appeared in 2008, there have been recent signs that investors are becoming more interested in gaining exposure to active management in ETFs. In fact, since 2008, the number of active fixed-income ETFs has grown exponentially. In John Hancock’s opinion, one factor behind the rapid growth is the changing composition of the U.S. bond market over the past ten years. Passive strategies have become much more concentrated in government debt. At the end of December, Treasuries accounted for over 40% of the Bloomberg U.S. Aggregate Bond Index, while the duration of the index has risen and is now at more than six years, indicating passive fixed-income ETFs carry a fair amount of interest-rate risk. Active fixed-income ETFs, on the other hand, aren’t required to track the benchmark. They can instead shift duration based on the manager’s outlook for interest rates. The management team can also manage sector allocation based on its ability to find relative value opportunities. Since the range of returns between fixed-income sectors can often be large, this creates an opportunity for active managers to add value over time.

Finsum:The number of active fixed-income ETFs has grown exponentially and John Hancock’s Steve L. Deroian believes one reason for that is the concentration of government debt in passive bond ETFs that carries a fair amount of interest-rate risk.