Displaying items by tag: ETFs

In an article for ETFTrends, Mark Hackett discussed whether fixed income can rally given the backdrop of rising inflation and rates. These are potent headwinds for the asset class given that both factors reduce the value of future income and principal. 

Of course, this is a major change after a decade of zero percent rates and inflation under 2%. Under these macro conditions, fixed income consistently delivered strong returns for investors with minimal volatility. In addition to these headwinds, there is also an increase in geopolitical tensions, re-shoring of supply chains, a nascent banking crisis, and a slowing economy which could stumble into a recession.

Despite these challenges, investors should still retain a considerable allocation to the asset class. In fact, fixed income has performed well since the middle of 2022 especially as inflation is trending lower, while the market is pricing in rate cuts by the end of the year. Additionally, fixed income is offering yields that are above that of equities. 

Due to these developments, fixed income investors can earn above-average returns with minimal risk given the yields in short-term Treasuries and corporate debt.

Finsum: Fixed income ETFs struggled in 2022 due to rising rates and inflation. Despite some headwinds, there are some silver linings for the asset class.

According to an article by Todd Rosenblum of ETFTrends, a survey of financial advisors revealed that 68% of financial advisors gain fixed income exposure for clients through bond mutual funds, followed by bond ETFs at 61% and individual bonds at 58%. 

Yet, the category continues to grow at an impressive rate with about $45 billion of inflows into US-listed bond ETFs. In total, bond ETFs have $1.3 trillion in assets which comprises 20% of the overall base, indicating more room for growth. 

Some of the major advantages of bond funds such as ETFs or mutual funds are increased diversification and opportunities to enhance returns which can’t be found when buying individual bonds. 

Bond funds can even be bought with a specific maturity date when your client may have a need for liquidity. It also avoids the risk of a credit downgrade or default which is elevated in an individual security. Another is that bond ETFs are much more liquid and with tighter spreads than individual bonds. Additionally, many of the most liquid and popular fixed income ETFs invest in hundreds of bonds issued by high-quality companies. 

Finsum: Fixed income ETFs are a fast growing category but still trail behind fixed income mutual funds in terms of popularity with advisors. However, it does offer major benefits compared to investing in individual bonds.

According to a recent study, advisors are moving away from revenue-sharing products such as mutual funds and toward products such as ETFs and SMAs due to regulatory pressure and changing investor preferences. In fact, advisor use of mutual funds is expected to decrease by 13% by 2024, according to research by Cerulli Associates. Dennis Gallant, associate director at Boston-based analytics firm ISS told FA-IQ that affluent clients tend to expect products that can be personalized, such as separately managed accounts, and capabilities such as direct indexing could bring that personalization down market” Iraklis Kourtidis, co-founder and chief executive officer at Rowboat Advisors, a direct indexing provider told the magazine that there are three main reasons why custom portfolios are preferential for advisors. He said one is to meet clients’ environmental, social, and governance preferences, “which you can’t do within a fund because it’s one-size-fits-all.” The second reason is tax efficiency, particularly tax-loss harvesting, “which you also can’t do with a big fund where you lump all the money together.” According to Kourtidis, the third “much less talked about” reason is the concept of “completion portfolios.” He said, “If someone has a lot of tech exposure through stock with their employer, for example, you can give people a custom portfolio that offsets that.”

Finsum:According to research by Cerulli Associates, advisors will be moving away from mutual funds and towards ETFs and SMAs due to regulatory pressure and changing investor preferences such as personalization.

American Century Investments recently launched a new actively managed fixed-income ETF targeting floating-rate debt securities. The American Century Multisector Floating Income ETF (FUSI) trades on the NYSE Arca and has an expense ratio of 0.27%. FUSI seeks to complement an investor's core bond holdings with current income, broad diversification, and the potential to mitigate the impact of rising rates. The ETF invests across various floating rate security segments including collateralized loan obligations (CLOs), commercial mortgages, residential mortgages, corporate credit, and other similarly structured investments. Plus, up to 35% of the portfolio may be allocated to high-yield securities including bank loans and other lower-rated floating-rate debt. Managers Charles Tan, Jason Greenblath, and Peter Van Gelderen build the ETF’s portfolio using a sector rotation approach that combines macroeconomic inputs, technical analysis of the relative value among various sectors, and fundamental research on individual securities. As part of the launch, Sandra Testani, Vice President of ETF Product and Strategy, stated, “FUSI compliments our current ETF income.” She also noted that “We believe a diversified floating rate mandate has the potential to mitigate downside risk and increase income, and we are excited to offer this on our ETF platform.”

Finsum:American Century recently launched the actively managed American Century Multisector Floating Income ETF (FUSI), which invests across various floating rate security segments such as CLOs, commercial mortgages, residential mortgages, and corporate credit.

Goldman Sachs Asset Management recently launched the Goldman Sachs Community Municipal Bond ETF (GMUN). The ETF, which trades on the NYSE Arca, seeks to provide investment results that closely correspond, before fees and expenses, to the performance of the Bloomberg Goldman Sachs Community Municipal Index, a rules-based index designed to track the municipal securities market with remaining maturities between one and 15 years. The ETF also has screens that consider certain social or environmental factors. By focusing on 1-to-15-year maturities within the investment grade municipal bond universe, the portfolio will seek to deliver diversified market exposure with lower duration and higher credit quality than the broader municipal market. The ETF is managed by Goldman’s Municipal Fixed Income team which brings decades of experience with an active and disciplined approach to investing in a market that is vast and fragmented. The fund has an expense ratio of 0.25%. According to Goldman, targeted allocation into municipalities and projects with positive impact will provide the opportunity to invest in education, healthcare, clean energy, and more community-related initiatives.

Finsum:Goldman recently launched its first muni ETF, the Goldman Sachs Community Municipal Bond ETF (GMUN), which provides exposure to tax-exempt municipal securities with remaining maturities between one and 15 years.