Displaying items by tag: active etfs

Vanguard celebrated changes in its fixed income leadership during the closing of the stock market at the Nasdaq in New York, and it continues to be a leader in Active Bond ETFs.

 The recently launched Vanguard Core Bond ETF (VCRB) and Vanguard Core-Plus Bond ETF (VPLS), managed by experienced members of the Vanguard Fixed Income Group, have shown strong performance compared to their peers over the past decade. 

With growing demand for active fixed income ETFs, particularly evident in the success of Vanguard Ultra-Short Bond ETF (VUSB), investors are seeking strategies that can adapt to market changes, especially with anticipated rate cuts by the Federal Reserve in 2024. Both VCRB and VPLS offer potential solutions, boasting relatively low expense ratios and providing complementary options to Vanguard's existing fixed income lineup.

Finsum: Rate cuts are a key reason to consider moving your bond ETF exposure to a more active lens in 2024

While the Federal Reserve has been successful in lowering inflation over the past 21 months, it still remains uncomfortably high. The consumer price index (CPI) peaked at 9.1% in June 2022 and reached 3.1% in its last reading which remains above the Fed’s 2% target.

Equally relevant, many of the disinflationary impulses which drove the rate of inflation lower have subsided, while there are indications of nascent inflationary pressures budding. For markets, the implication is that the status quo prevails with the Federal Reserve holding rates at 5.50% since July of last year.

While bonds enjoyed a decent rally as the Fed moved from hiking to holding steady, volatility remains elevated due to the current uncertainty about inflation and Fed policy. As a result, the bulk of gains in fixed income proved to be fleeting. According to John Hanock, these conditions are ideal for active fixed income as managers will be able to take advantage of inefficiencies and dislocations caused by the current environment.

The firm believes that active managers will be able to outperform by overweighting quality, intermediate-term bonds, and defensive sectors. It also likes mortgage-backed securities (MBS) due to attractive yields without sacrificing quality. In contrast, it wants to underweight cyclical sectors and high-yield bonds given its concerns about a weakening economy in the second-half of the year. 

Finsum: Volatility has risen for fixed income ever since the outlook for inflation and Fed policy have gotten murkier. Here’s why John Hancock believes active fixed income is the ideal way for investors to take advantage of attractive yields. 

Recent bond market volatility has caused discomfort for fixed-income investors, but it presents an opportunity for active management to potentially enhance returns. 

Despite efforts by the U.S. Federal Reserve to tighten monetary policy and curb inflation, uncertainty remains as to the future direction of interest rates. This uncertainty has led to fluctuations in bond yields, creating both challenges and opportunities for investors. 

By focusing on quality and liquidity, particularly in areas such as agency mortgage-backed securities, active managers can navigate these challenges effectively. As the market evolves, active management offers the flexibility to capitalize on changing conditions and uncover pockets of opportunity, potentially outperforming despite ongoing uncertainty.

Finsum: Macro uncertainty is giving active managers an upper handed in bond markets, and it could lead to additional alpha. 

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.