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Volatility has spiked in 2022 in response to rising rates and international turmoil, but that could be good news for financial advisors according to Cerulli. The latest Edge publication demonstrated that Advisors are being leaned on to deliver critical advice in response to high inflation, economic sluggishness, and deteriorating equity prices. For existing clients, they advise advisors to concentrate on tax loss harvesting and long-term planning. Advisor’s who capitalize on providing these while rebalancing risk in portfolios are putting their clients in the best position to hit a rally coming out of the turmoil. Advisors should lean into their attributes during high volatility.

Finsum: Research shows financial advisors provide critical value when it comes to relating to clients and helping them understand economic circumstances, volatility can provide a chance to capitalize.

Wednesday, 03 August 2022 13:14

Custom Indexing: Huge Projected Growth

Firms are buying up custom indexing solutions rapidly as possible in order to meet the excess demand coming from consumers, but also to prepare for the future. Investment experts and advisors believe there is a strong possibility that custom indexing will shake up the investment products space, the way ETFs redefined the early oughts. Olive Wyman expects custom solutions will capture $1.5 trillion of assets by 2025,  over a 300% growth from the 2020 levels. Custom solutions are more flexible to address clients' desires, and they can be implemented to cater to ESG criteria more stringently than ETFs. However, the greatest advantage is their tax efficiency where stocks can be dropped for tax loss harvesting.

Finsum: Direct indexing has benefited from the rapid growth in fintech solutions, which have lowered minimums across the board. 

According to the Index Industry Association’s annual ESG survey, 76% of respondents integrate ESG when running both passive and active fixed income mandates. This is a large jump from 42% in 2021. The survey, which was conducted with 300 asset managers, also found that 87% of passive asset managers are integrating ESG into their bond allocations. 85% of asset managers stated that ESG had become a higher priority over the past 12 months. Out of this figure, 43% said the concern around climate and corporate governance was the driving force behind that decision. Other reasons were a need for more diversified returns, regulatory and reputation risk, high energy prices, and geopolitical events. Almost a third cited a desire for increased returns. The biggest driver was their client’s knowledge of ESG, with 53% stating they were “very confident” in their clients' ESG knowledge.

Finsum: Asset managers are implementing ESG into fixed income allocations at a higher rate due to climate and corporate governance, diversified returns, higher energy prices, and client knowledge.

Research from Morningstar's annual Global Fund Flows found that actively managed fixed income funds saw $422 billion in outflows during the first half of the year. That figure accounted for 74% of all outflows from active portfolios. Active funds as a whole saw $568 billion in outflows, while index funds generated $432 billion in inflows. The net difference of $136 billion in outflows was the most since June to December of 2008, during the height of the Financial Crisis. The high percentage of active fixed income outflows is partly a result of the automatic rebalancing of model portfolios and target-date funds. Since equity returns have been more negative, automatic rebalancing has been triggering more trades to equity strategies to get allocations back in line. Passive fixed income funds saw $90 billion in inflows.

Finsum: Active fixed income funds accounted for 74% of all outflows from active portfolios during the first half of the year as automatic rebalancing favored equity strategies.

Wednesday, 03 August 2022 07:39

Bond ETFs Have Hidden Costs

According to a paper published last month by Christopher Reilly of Boston College, corporate bond ETFs listed in the US, on average, pay 48 basis points a year in hidden costs that result from custom creation baskets. Since most fixed ETFs track thousands of individual bonds, custom creation baskets allow issuers and authorized participants to create a sample of the holdings which mirror the performance of the ETF. An authorized participant is an organization, typically a bank, that manages the creation and redemption of ETF shares in the primary market. Without sampling, the authorized participants would have to source every security. However, the custom ETF creation baskets allow authorized participants more flexibility to include securities that could significantly underperform the underlying index. This customization results in hidden costs that investors of ETFs could incur.

Finsum: Corporate bond ETFs are paying an average of 48 basis points a year in hidden costs resulting from customized creation baskets.

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