Displaying items by tag: ETFs

Strive Asset Management, an upstart competitor to Blackrock and Vanguard, is launching its first fixed income ETFs. Strive is based in Ohio and was founded in 2022 by Vivek Ramaswamy who is now running for President in the Republican Primary. Ramaswamy resigned from the firm earlier this year to focus on his political ambitions, but Strive’s mission and his political campaign clearly have some overlap.

Ramaswamy and Strive are both defined by their opposition to ESG investing and believe that it’s a detriment to investors and the country. Therefore, he’s been critical of asset managers like Blackrock and Vanguard who use their passive stakes in companies to encourage management teams to consider ESG factors when making decisions.

In contrast, Strive and Ramaswamy believe that companies should focus on maximizing profits rather than other factors. Its first 2 fixed income ETFs are the Strive Enhanced Income Short Maturity ETF (STXT) and the Strive Total Return Bond ETF (BUXX). STXT provides total exposure to fixed income with a cost basis of 49 basis points, while BUXX is designed to generate yield for investors by investing in short-duration bonds and charges 25 basis points.

Finsum: Strive Asset Management is launching its first 2 fixed income ETFs. The company differentiates itself by eschewing ESG and rewarding companies that don’t use these metrics.

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.

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.

After a rough 2022 for fixed income, 2023 has seen the asset class eke out modest gains. But, it hasn’t been smooth sailing especially in recent months as most of the gains have been wiped out amid a deluge of positive economic data which is increasing the odds that the Fed’s rate hikes are not done and increases the risk of inflation re-igniting.

However, this hasn’t slowed inflows into fixed income ETFs. According to ETF.com’s Michelle Lodge, the major reasons are higher yields, increased awareness from advisors and institutional investors, and continued uneasiness about the macro environment. In fact, inflows into fixed income ETFs are outpacing inflows into equity ETFs. 

Many believe there is a virtuous cycle at work. Fixed income ETFs are increasing liquidity which in turn, is leading to more institutional money flowing into the asset class. The virtuous cycle could pick up more velocity with active fixed income growing in popularity as many of these funds look for opportunities in less liquid areas of various durations and credit quality. 

Overall, the popularity of fixed income ETFs is a major development in 2023 even despite a volatile couple of years for bonds. 

FinSum: Fixed income ETFs are seeing strong inflows in 2023. This can be attributed to higher yields, a shaky macro outlook, and strong demand from advisors and institutional investors.

Until a couple of months ago, the market’s consensus forecast was that inflation would gradually ebb lower as the Fed’s rate hikes would choke off economic activity, resulting in an inevitable recession. Needless to say, this scenario was very bullish for fixed income as it would let investors take advantage of higher yields and then profit from appreciation in bond prices.

Of course, reality had a different plan. Rather than a recession, we are seeing the economy continue to grow and add jobs. In fact, there is increasing evidence that the business cycle could be turning higher. Similarly, inflation has proven to be stickier than anticipated, and many believe we could be in a regime of ‘higher for longer’ inflation.

For ETF.com, Lisa Barr spoke to Monish Verma of Vardhan Wealth Management to get his insights on how to navigate this terrain. He believes that inflation will be structurally higher over the next decade which means more volatility in fixed income. 

In terms of duration, he likes the short-end at the moment but recommends tactically adding longer-duration closer to the end of the year as the Fed nears the end of its hiking cycle. He also recommends fixed income ETFs that are low-cost and diversified as offering the most upside. 

FinSum: Many fixed income investors were caught off guard when the economy and inflation proved to be more resilient than expected. Here are some strategies to consider if inflation continues to linger.