Displaying items by tag: activeETFs

According to Russell Investments, the outlook for active fixed income looks quite attractive in 2023. They see opportunities to outperform benchmarks due to market and trading inefficiencies, index construction, and a volatile macro environment due to the lack of clarity around the Fed’s hiking schedule.

Compared to active equity funds, they see more opportunity for alpha in active fixed income for a variety of reasons. A major one is that fixed income indices are constructed with thousands of securities, often with different durations, coupons, and covenants. For astute managers, this can create opportunities to uncover value especially amid rating changes, new issues, and rebalancing by indexes. 

Another favorable factor is that many participants in the fixed income market are not focused on maximizing returns. Instead, there are forced buyers of fixed income due to capital requirements like insurance companies and banks. Further, central banks remain active in these markets as well, and they telegraph their intentions well in advance. 

Finally, there are simply more inefficiencies in fixed income as the vast bulk continue to be traded over-the-counter which leads to less price transparency and wider bid-ask spreads. 

Finsum: Russell Investments sees opportunity for investors in active fixed income funds due to more inefficiencies, less transparency, and more opportunities to uncover value..

A recent blog post by the UBS Chief Investment Office analyzed the performance of active fixed income managers in 2022. Given the rise in rates and challenging macro environment, it’s not surprising that there was a large dispersion in returns which rewarded active managers who were able to successfully navigate the turbulence. 

Another factor contributing to this dispersion was the outperformance of short duration bonds as compared to longer duration ones. Similarly, floating rate bonds also outperformed vs fixed rate. In municipal and corporate debt, higher quality outperformed lower quality. 

As a result, many active fixed income managers were able to outperform their benchmarks. However, there are some challenges when it comes to assessing active manager performance. Fro one, fixed income indices’ individual holdings are often illiquid and don’t reflect transaction costs. 

With these caveats in mind, there are still some important takeaways to consider. Active managers tend to perform better in less efficient markets, where there is more opportunity for alpha. Additionally, active managers tended to outperform when they had more flexibility to take advantage of various drivers of potential outperformance. 

Finsum: Active fixed income managers outperform vs passive indices in 2022. Here are some reasons why.

According to Daniil Shapiro of Cerulli Associates, there is a major product development opportunity for active fixed income ETFs in the coming years. A variety of factors are behind this segment’s growing popularity including the increasing acceptance of the ETF structure, growth of advisors who are comfortable with fixed income ETFs, and rising rates which lead to increased structural demand for fixed income products.

The report was compiled by Cerulli Associates based on polling of financial advisors and was covered by Kathie O’Donnel in an article on Pensions & Investment.

The major takeaway is that use of fixed income ETFs by advisors is rapidly growing with 70% reporting use in 2022, up from 63% in 2021. Most ETF issuers pointed to greater advisor acceptance of the product and institutional demand as drivers of the ETF market. Among issuers, 66% see fixed income as their primary focus which exceeded equities at 57%. 

Overall, this survey reveals that there continues to be opportunity for ETF issuers in the active fixed income space, given rising demand. While there are plenty of options in passive fixed income, there are relatively less active options. 

Finsum: The fixed income ETF category is rapidly expanding. Within the space, passive is saturated but plenty of opportunity remain for active managers especially given expectations of rising demand in the coming years.