Displaying items by tag: fixed income

Fidelity Investments launched a new active fixed income ETF this week, the Fidelity Low Duration Bond Factor ETF (FLDB). The ETF will invest 80% of its assets in short duration, investment-grade debt, consisting of floating rate notes and Treasuries, with a fee of 20 basis points. It seeks to balance credit risk and interest rate risk while outperforming benchmarks. 

Greg Friedman, Fidelity’s head of ETF management and strategy, noted, “It’s an asset class within fixed income that did not have any coverage until this morning. It fits a client's need to have that short duration exposure to a broad-based market of fixed income products.” 

Fixed income ETFs are experiencing a boom in terms of new issues and inflows. According to Tony Kelly, the co-founder of BondBloxx, assets in fixed income ETFs will reach 40% by the end of the decade from 20% currently. Active ETFs are finding traction as they allow for specific thematic exposure without sacrificing liquidity. Last year, assets under management for active ETFs increased by 37%. 

Fidelity is also jumping on the trend. In addition to launching FLDB, it debuted the Fidelity Fundamental Large Cap Value ETF (FFLV).  Its new line of ‘Fundamental suite ETFs’ will be active as it will utilize a quantitative overlay to their typical process. In total, Fidelity has 66 ETFs with $55 billion in assets under management. 

Finsum: Fidelity is betting big on active ETFs as it launched 2 new ones this week. Investors have been receptive to these products as it gives them narrow exposure in a liquid vehicle. 

The rise in bond yields presents an opportunity for fixed income investors to find value according to Penter Bentley, the co-manager of the BNY Mellon Global Credit Fund. He notes that bond yields are close to their highest levels since the financial crisis and that conditions have been improving for investment-grade debt. 

Due to these developments, he anticipates healthy returns for global and regional investment-grade credit. A key factor is borrowers have strong balance sheets with lower leverage than before the pandemic. In fact, Bentley believes that certain segments within fixed income could perform better than equities. He identifies ‘fallen angels’, short-duration high yield bonds, and emerging market corporate debt as having the most potential for outperformance this year. 

Some uncertainties that could cloud this outlook including the election in November, the Fed’s ability to cut rates, and a tense geopolitical situation with Russia-Ukraine and the Middle East.  Thus, investors should expect volatility to persist all year which means more opportunities for active managers to outperform. 

Another place that fixed income investors can find value is with global credit. Historically, global credit has delivered better returns when markets are emerging from a downturn. In terms of global credit, Bentley sees opportunities in European credit markets and emerging market debt.   

Finsum: Peter Bentley, the co-manager of the BNY Global Credit Fund, believes that investors can find value in fixed income. He sees the potential for strong returns in global credit, short-duration high yield debt, and ‘fallen angels’. 

US Treasuries continue to move lower as hopes for a pivot in Fed policy are eroding. From the start of the year, the yield on the 10-year has climbed from 3.9% to above 4.3% to reach their highest levels since November. In total, it has retraced nearly half of the rally that began in October of last year. 

Over this period, the number of rate cuts expected in 2024 has declined from 6 to 3 as has the timing. Primarily, this is due to the economy remaining strong as evidenced by the labor market and inflation that has proven to be more entrenched than expected. All in all, the narrative has certainly changed as some now believe the Fed may actually hike rates further especially as there are indications that the steady decline in inflation has ended. 

Minutes from the last FOMC meeting also showed that committee members are concerned about the risk of inflation re-igniting if it begins to cut too soon. Overall, it remains ‘data-dependent’. However, all the recent data has undermined the case for immediate or aggressive cuts. According to Rich Familetti, CIO of US fixed income at SLC Management, the current Fed stance "is going to make it very hard for rates to fall much further from here… The pain trade is at higher rates and we will likely experience that."

Finsum: Treasuries continued their losing streak as higher interest rates have weighed on the entire fixed income complex. The market is now expecting 3 cuts in 2024 down from 6 at the start of the year.

JPMorgan believes that when it comes to fixed income, active outperforms passive. The bank believes that the benchmark, the Bloomberg US Aggregate Index (AGG), is fundamentally flawed due to an antiquated design. It doesn’t provide sufficient diversification as it only captures just over half of the bond market. This is in contrast to equities, where passive indexes reflect a much larger share of the total market.  

This is because the benchmark was created in the 1980s where fixed income was dominated by Treasuries, agency mortgage-backed securities, and investment-grade corporate bonds. Now, there are many more types of fixed income securities that are not represented in the AGG. This also means more opportunities for active fixed income managers to outperform. 

Another fundamental flaw of the AGG is that borrowers with the most debt have the most weight. This means that passive fixed income investors have the most exposure to the companies with the most debt. In contrast, active managers can weigh their portfolios by factors that are more meaningful and relevant to long-term outperformance. 

JPMorgan’s active funds differ from the benchmark. Instead of short-duration Treasuries, it allocates more to short-duration, high-quality asset-backed securities as these have outperformed in 12 of the last 13 years. The bank also eschews securities that the benchmark is forced to own such as low-coupon MBS. In terms of corporate bonds, JPMorgan’s active funds prioritize quality. This is in contrast to AGG as 42% of its corporate bond holdings are rated BBB. 

Finsum: JPMorgan makes the case for why investors should choose active fixed income. It identifies a couple of fundamental flaws in the construction of the Bloomberg US Aggregate Bond Index.

The stronger than expected jobs report and inflation data have punctured the narrative that the Fed was going to imminently embark on a series of rate cuts. As a result, volatility has spiked in fixed income as the market has dialed back expectations for the number of hikes in 2024.

Investors can still take advantage of the attractive yields in bonds while managing volatility with the American Century Short Duration Strategic Income ETF (SDSI) and the Avantis Short-Term Fixed Income ETF (AVSF). Both offer higher yields than money markets while also being less exposed to interest rate risk which has led to steeper losses in longer-duration bonds YTD. 

SDSI is an active fund with over 200 holdings and an expense ratio of 0.33%. Its current 30-day yield is 5.2%. The ETF’s primary focus is generating income by investing in short-duration debt in multiple segments such as notes, government securities, asset-backed securities, mortgage-backed securities, and corporate bonds. 

AVSF is even more diversified with more than 300 holdings and has a lower expense ratio at 0.15%. It has a 4.7% 30-day yield. AVSF invests in short-duration, investment-grade debt from US and non-US issuers. The fund’s aim is to invest in bonds that offer the highest expected returns by analyzing a bond’s income and capital appreciation potential. 

Finsum: Recent developments have led to a material increase in fixed income volatility. Investors can shield themselves from this volatility while still taking advantage of attractive yields with short-duration bond ETFs.