Displaying items by tag: fixed income

July saw a slowing of inflows into fixed income ETFs, while inflows into equity ETFs ramped higher. $17 billion flowed into bond ETFs which was dwarfed by the $43 billion of inflows into equity ETFs. For the month, the 3 most popular fixed income ETFs were the iShares Core US Aggregate Bond ETF, the Vanguard Total Bond Market ETF, and the iShares 20+Year Treasury Bond ETF. 

This isn’t totally surprising given the poor performance of bonds in recent months due to a surprisingly resilient US economy which is leading to increased odds of more hikes and higher rates for longer and decreased odds of a Fed rate cut and continued cooling of inflation. In contrast, equity markets have been on fire with the S&P 500 now closing in on it's all-time highs from January 2022 while many tech stocks and indices are already at new highs. 

Overall in 2023, the share of inflows has been pretty balanced between fixed income and equity ETFs which is a new development as typically equity ETF inflows dominate. This is largely due to investors wanting to take advantage of higher yields and advisors and institutions becoming more comfortable with fixed income ETFs. 

Finsum: There was a slowdown of inflows into fixed income ETFs in July due to increasing volatility and more uncertainty about the Fed’s rate hike path.

In 2022, active ETFs accounted for 15% of total global inflows into ETFs. In 2023, active ETFs now account for 25% of total inflows. 

Is this a temporary blip due to the current environment of economic uncertainty and high rates and inflation? Or, is this a new trend that we should expect to continue for the foreseeable future.

In a recent report, State Street supports the latter argument. The asset manager sees recent regulatory reform as a major catalyst for growth in the active sector. Rule 6c-11 modernized the process to launch ETF, shortening the runway from many years to 60 days. This has resulted in an explosion of ETF offerings. In the last 3 years, 750 active ETFs have been created, while only 325 were created in the 11 years prior to Rule 6c-11. 

Another regulatory change is that ETF providers are able to be slightly less transparent with their holdings. This has led many managers to launch their own ETFs who were previously concerned about giving their best ideas for free. And, it’s also led many mutual funds to also offer active ETFs with similar strategies. 

It’s particularly bullish on active fixed income ETFs as it sees more room for innovation in the space. And, it notes that many advisors and institutions are just becoming familiar with the asset class.

Finsum: Active fixed income and equity ETFs are seeing incredible growth over the last couple of years due to a combination of regulatory changes and innovation. 

There are many ways for investors to buy Treasuries, but the increasingly popular option is through the iShares 20 Plus Year Treasury Bond ETF (TLT) which is a blend of 10-year and 30-year Treasuries. Currently, this fixed income ETF offers a yield of 3% and is down 2% YTD.

The ETF has been hammered in recent sessions due to Fitch’s downgrade of US debt, larger than expected budget deficits, and rates that are likely to stay elevated at least into Q1 of next year. Another potential reason for TLT’s poor performance in recent sessions is that Pershing Square Capital Management founder Bill Ackman unveiled a bet against TLT and long-duration Treasuries. 

Ackman shared his reasoning on Twitter. He believes that ‘structural’ changes in the world such as the re-shoring of supply chains, an increase in defense spending, electrification of the energy sector, aging demographics, and a tight labor market are indicators that inflation is going to remain high for a meaningfully long period of time. 

Based on this, he believes that long-term Treasuries will need to offer higher yields to lure investors, while they remain currently priced as if inflation is transitory given the 30-year’s current yield of 4.2% inflation. He believes that it should be yielding between 5.5% and 6% given his expectations of inflation, implying losses between 31% and 43%. 

Finsum: Bill Ackman is one of the most successful investors of his generation. Recently, he unveiled a short position against long Treasuries and TLT, one of the most popular fixed income ETFs.

2023 was supposed to be the year of fixed income. 

Coming into the year, the consensus was that fixed income would rally as the economy plunged into a recession, forcing the Fed to terminate its rate hike cycle and even begin cutting before the year was over. The bond bulls got another catalyst following the regional bank crisis which many believed would impair credit markets and also force the Fed’s hand.

Yet, these prognostications have proven to be false. Instead, the US economy continues to grow and add jobs every month. In fact, there are more signs that the economy could be re-accelerating rather than contracting. As a result, the Fed continues to hike, and bonds have given up all their gains on the year. 

Despite consensus predictions proving wrong, most Wall Street analysts remain bullish on fixed income. They continue to believe that yields are at or near their ‘cycle highs’ and that a trifecta of factors like cooling inflation, mild economic growth, and geopolitical risks mean that investors should continue adding exposure especially given that equities are unattractive from a valuation perspective at the moment. 

Finsum: 2023 was supposed to be a big comeback for fixed income given expectations of a recession in the second-half of the year. Yet, this has proven not to be the case.

At the VettaFi Fixed Income Symposium, Todd Rosenbluth hosted a conversation between Stephen Laipply, the global co-head of iShares fixed income ETFs and Anmol Sinha, fixed income investment director at Capital Group. The conversation spanned a wide array of topics regarding the advantages of investing in fixed-income through ETFs.

Both also spoke of the recent growth in active fixed income ETF offerings, and why they are bullish on the category going forward. However, they rejected the binary of being an active or a passive investor and instead see a role for both strategies in a portfolio.

Active fixed income ETFs allow investors and advisors to better achieve specific goals such as exposure to a certain segment of the market or take advantage of market inefficiencies. Both are in favor of pairing an active ETF with a passive one to achieve ‘total portfolio exposure’. 

Fixed income ETFs are outpacing equity ETFs in terms of inflows over the last couple of years due to yields at their highest level in decades and a shaky economic outlook. Within the fixed income ETF universe, active strategies are seeing the most growth as they have outperformed amid recent volatility and advisors and wealth managers are becoming increasingly comfortable with the asset class.

Finsum: At the Vettafi Symposium, there was a discussion centered around fixed income ETFs and their future outlook. Regarding active vs passive ETFs, there was agreement that both are complementary rather than competing.