Displaying items by tag: ETFs

Active ESG Bond ETFs may be a mouthful, but they are also where the market is headed. Most passive bond ETFs have been left in the dust tracking big indexes and getting killed on rising rates with too much exposure to government bonds. Active bond funds have a wider array of maneuvers, and can act more swiftly in order to keep pace with the market. The case for active equity is more difficult, but in macro environments and when so many investors are moving rapidly into ESG fund managers have an edge at selecting bonds that will outperform. The additional exposure to ESG is a subsector that has outperformed market benchmarks because of the rising demand from a new wave of investors. Additionally fund managers seem to outperform within ESG as well because they have a more discerning eye.

Finsum: There has been a second coming for active ETFs and that will only continue if the Fed has to stomp on the brakes.

There has been a sharp uptick in the high-value bond ETF trades in the last 12-months which most investors are attributing to activity from large institutional investors. Transactions are up as much as 36% on some platforms from the previous year. This has been part of a longer more ongoing trend that has been successful for many bond funds. Since the GFC, investors have questioned the resiliency of these funds to economic downturns, but regulators and investors alike are pleased with their performance in the covid pandemic. Just as important to this is the support from the Fed and Fiscal policy to the economy. Stepping in with bond relief has helped these ETFs. Finally, the increase in investment in bond ETFs has actually led to tighter underlying spreads in bond markets themselves and reflects better liquidity.

Finsum: Many believe that over-investment in index funds could be disruptive to equity volatility over time, but it appears to be stabilizing bond spreads.

State Street launched a new fund LQIG which started trading on May 12, an effort to give investors exposure to liquid bonds with high traceability. The market is rife with turmoil, and investors are looking to different fixed-income products to provide an inflation-beating yield and relatively liquid assets. The fund seeks exposure to 400 investment-grade corporate bonds denominated in dollars. These differ from most fixed-income funds which are designed to give broader market exposure that doesn’t prioritize traceability. The high traceability comes with lower bid-ask spreads as well as more transparency into their holding's real-time valuations.

Finsum: Investment-grade corporate debt is looking relatively more attractive with market volatility at such highs.

Volatility ETFs reached infamy in the 2018 Volmageddon episode, but these formerly destructive ETFs making a Lazzarath-like comeback. Both the SVIX and UVIX delivered record style gains amid inflows due to market gyrations UVIX closed 37% higher but was up 42% in mid-day trading. The wild up and downs came in response to the Fed meeting and a tanking S&P the following day. Advisors are steering investors toward both UVIX and SVIX because this is exactly where these products thrive. However, there is still a substantial risk as investors have suffered greatly in the past from these products and the ‘juice’ they are receiving could be detrimental on the downside.

Finsum: This is unprecedented volatility in the post-GFC, and it could continue until inflation is under control.

Direct Indexing is being heralded as the next big wave of investment products, as it gives investors the power to take advantage of tax-loss harvesting and customize it to their interests. However, the dual objectives that they propose could come to compete with each other and undermine investor interests. If investors maximize the tax-alpha they aren’t really aligned with their interests which younger investors are holding as a high priority. Riding a portfolio of all ‘greenwashers’ gives investors few options for tax purposes and deviates too far from the underlying index. The most effective solution might be for financial advisors to develop a better understanding of client interests rather than leaning on a magical new product.

Finsum: Some are calling direct indexing active management in disguise, but investors trying to capitalize on either customization or tax loss might still find it an attractive option.