Displaying items by tag: bonds

2023 has been quite different compared to 2022 especially from a financial markets perspective. Due to raging inflation and a hawkish Fed, 2022 saw weakness in both stocks and bonds. In contrast, both asset classes have delivered positive returns in 2023 YTD despite significant and continued headwinds.

This is particularly the case for active fixed income. In an article for the Financial Times, Madison Darbyshire and Harriet Agnew highlight how large asset managers have been increasing allocations to the category as they look to lock in higher rates with the Fed in the final innings of its rate hikes. Analysts are noting demand from institutional and retail investors, across the active fixed income spectrum. 

In 2022, $332 billion moved out of the category, but 2023 has already seen inflows of $100 billion in the first third of the year. This trend is expected to only strengthen with active fixed income ETFs expected to continue taking a larger share of the fixed income and ETF universes. According to State Street CEO Yie-Hsin Hung, "It feels like the beginning stages of what happened in equities.”

Finsum: After a poor 2022, inflows into active fixed income are sharply higher as they look to lock in higher rates given the end of the Fed’s tightening and increasing odds of a recession.

According to an article by Katherine Greifeld and Emily Graffeo, Blackrock is launching its own ETF for income investors. This marks new fixed income CIO Rick Reider’s first ETF launch. 

The actively managed BlackRock Flexible Income ETF will invest in more higher-yielding parts of the fixed income spectrum like high-yield bonds, emerging market debt, and securitized assets. It will have an annual expense ratio of 50 basis points and will be managed by Rieder, Jacob Caplan, and Samir Lakhani. 

Fixed income ETFs are experiencing rapid growth in terms of inflows and new issues due to high rates and an uncertain economic outlook. Many analysts anticipate ETF flows to become a dominant factor within the fixed income market like ETFs have for equities. Within the category, Blackrock is the leader with $600 billion in assets out of a total of $1.4 trillion in fixed income ETFs. 

According to Blackrock, these ETFs are serving investors while also leading to more liquidity in fixed income markets. BINC carries an annual expense ratio of 50 basis points and is actively managed by a team including Rieder, Jacob Caplain and Samir Lakhani.

FinSum: Blackrock is the leading issuer and manager of fixed income ETFs. Recently, it launched the Blackrock Flexible Income ETF which invests in higher-yielding debt.

In a blog post for JPMorgan, Nancy Rooney, the Global Head of Managed Solutions, discusses how many investors have been aggressively buying short-duration fixed income given that yields are at their highest levels in decades and economic risks abound. Some of the most prominent ones include a slowing economy that many believe is likely to tip over into a recession, a standoff between Congressional Republicans and the White House over the debt ceiling, a stressed banking system, and a hawkish Fed.

While this move has paid off so far in 2023, Rooney raises some concerns that it may undermine investors’ efforts to reach their financial goals. Having too much allocation to fixed income and being underexposed to equities will hinder portfolio returns in the long-term. In fact, a portfolio solely in Treasuries would have failed to beat inflation over the last 30 years.  

She recommends that investors think about equities as the growth engine for their portfolios, while Treasuries are more of a cushioning. This means that investors should consider using periods of fixed income outperformance to regularly rebalance their allocations in order to stay on track towards their financial goals. 

Finsum: Fixed income has been a strong performer over the last couple of quarters. Yet, it doesn’t mean that investors should go overboard in increasing exposure to the asset class.

There are considerable headwinds facing the stock market and economy such as a hawkish Fed, uncomfortably high inflation, debt ceiling deadline, an upcoming election year, increasing risk of a recession, a potential regional banking crisis, and geopolitical tensions. 

Yet, the volatility index has trended lower for much of the year and is now at its lowest levels in over a year. Ron Isbitts covered this matter and why it could be an opportunity for ETF investors in an article for ETF.com.

If investors believe that volatility is mispriced, then there are some different volatility ETFs to consider. The ProShares VIX Short-Term Futures ETF offers exposure to volatility over the next 1-2 months. The ProShares VIX Mid-Term Futures ETF holds volatility contracts with a duration of 3 to 6 months. 

There are also ETFs for those with a variant view. The ProShares Short VIX Short-Term Futures ETF moves inversely to volatility, allowing holders to profit from falling volatility. For those who want to generate income from volatility, the Simplify Volatility Premium ETF also tracks volatility but also produces a dividend for holders. 

Note that these ETFs tend to have slippage, high costs, and underperform the S&P 500 over the long-term. Thus, they are best used tactically and with discretion.

Finsum: Volatility is declining despite several potent risks for the market. There are several options for investors to consider.

In an article for ETF.com by Michelle Lodge, she examines whether success in portfolio management is a matter of skill or luck. According to survey results from S&P Dow Jones, there is little connection between good choices made by a manager and portfolio performance. 

According to Craig Lazarra, the Director of Index Investment Strategy at S&P Dow Jones, “Our report for year-end 2022 finds little evidence of persistent active management success, despite considering a variety of metrics and lookback periods.” 

According to the research, investors are better off with low-cost, diversified ETFs. Additionally, success in terms of picking stocks and ETFs is not repeatable. Additionally even in a poor year for passive funds, 51% of active managers still underperformed their benchmarks in 2022. 

Another piece of evidence cited is that managers who outperformed in the first half of the last decade, failed to outperform in the second-half of the decade. The same dynamic appears with active fixed income managers with no indication that success in one year is likely to repeat in subsequent years. 

Finsum: Research shows that active fixed income and equity outperformance is unlikely to repeat in following years.