Displaying items by tag: active etfs

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. 

Financial advisors have begun to embrace the concept of buffered ETFs. These specialty funds track equity indices, capping the potential upside, which pays for downside protection (the buffer) if the index experiences a decline.

While this concept has practical portfolio applications, these funds have another unique feature advisors should know about: they mature (and reset).

A buffered ETF has a stated cap and buffer that stays in place for a specific period, in many cases one year. This means the cap and buffer reset at the end of the period (at maturity). It also means that investors buying the ETF any time after the first day of the period should be aware of the remaining cap and buffer for that ETF for the rest of the period they bought within.

Here’s an example: let’s say a fund that caps its return for the year at 10% has already experienced a 5% decrease since the start of the period. An investor purchasing the fund at that point has a 15% cap for the remaining period – this is a good thing. The opposite is also true. Had the fund already experienced an 8% gain in the period, the buyer would only have the potential to gain 2% for the remainder of the period.

Finsum: Buffered ETFs have a unique feature that every financial advisor should know about: they have a maturity date when their upside cap and downside buffer resets.

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.

Buffered ETFs are a relatively new type of fund that offers a unique risk-management approach. These funds track an underlying index to replicate its performance while providing a "buffer" against significant losses. However, this protection comes at a cost, as the fund's upside is capped at a predetermined level.

As investor interest in buffered ETFs has grown, fund providers have diversified their offerings by tracking various indices and offering a range of buffer and cap levels. Several applications for these funds have also emerged, such as the ability to put cash to use that might otherwise be held out of the market.

Investors in or nearing retirement are particularly susceptible to market volatility, often resorting to holding cash to protect against short-term market fluctuations. While providing protection, this strategy also prevents them from participating in potential market growth.

Buffered ETFs bridge this gap, allowing investors to enjoy market gains up to the defined cap while safeguarding against substantial losses. With this level of protection built into the fund, investors may have more confidence to transition a portion of their portfolio out of cash and back into the market.

Finsum: Investors in or near retirement who fear market downside now have a place to invest that cash they have been holding on the sidelines: buffered ETFS.

A major development in 2023 was the boom in active fixed income ETFs as measured by inflows and launches of new ETFs. Some reasons for interest in the category include opportunities for outperformance, lower volatility, and diversification. Ford O’Neil, fixed income portfolio manager at Fidelity Investments, sees structural reasons for the asset class’s recent success and believes it will continue.

According to O’Neil, there is more potential for outperformance in active fixed income vs equities, because indices only cover about half of the total bond market. In contrast, equity indices encompass a much larger share of the entire stock market. This means that the market will be less efficient, resulting in more undervalued securities. 

Active managers are also able to better navigate the current landscape, where there is considerable uncertainty about the economy and monetary policy given more latitude when it comes to security selection. He notes that active fixed income ETFs have delivered strong outperformance vs passive fixed income ETFs over the last 8 years. 

He stresses that identifying these opportunities is dependent on proper fundamental research and quantitative analysis followed by effective implementation. O’Neil is the co-manager of several active fixed income ETFs including the Fidelity Total Bond ETF (FBND) or the Fidelity High Yield Factor ETF (FDHY).