Displaying items by tag: income
For cautious-minded investors, active fixed income could be a much better option than cash. This is according to SPDR Exchange Traded Funds’ Managing Director and Head of Research, Matthew Bartolini, who notes that some of the major advantages of active fixed income are that it offers more flexibility, consistent performance, and can be more tax efficient. Overall, it can help portfolios generate income, dampen volatility, while still retaining exposure to upside opportunities.
Many advisors and investors are already aware of these benefits as active fixed income has taken a large portion of flows relative to its size compared to passive fixed income and equity ETFs. As Bartolini notes, “Active fixed income has been really a consistent engine of support within the active [ETF] construct — not only from flows but also returns.” Another factor in active fixed income’s growth is that it allows investors to take advantage of elevated yields.
Bartolini also believes that future returns will be appetizing for the asset class, although there will be some volatility to stomach. He also believes that cash is less desirable due to the reinvestment risk. His major focus is on constructing portfolios to generate income while properly balancing risk.
Finsum: Active fixed income is seeing major growth in terms of inflows. Here’s why the asset class is well-positioned for the current moment given the combination of elevated yields and an uncertain macro environment.
In a CNBC interview, Blackrock COI Rick Rieder shared some thoughts on Blackrock’s newest active fixed income fund, and why he believes that active fixed income offers several advantages for investors.
Active fixed income managers have the latitude to seek opportunities that are beyond what’s represented in the indices. As an example, he cites the Blackrock Flexible Income ETF (BINC) which has outperformed its peers since its inception in late May. Over this period, BINC is up 0.3%, while the iShares Core US Aggregate Bond ETF (AGG) is off by 4% and the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) is down 0.2%.
BINC’s biggest allocation is to bonds outside of the US at 22% with US high yield debt and US investment grade debt accounting for 17% and 14%, respectively. According to Rieder, the stronger US dollar is leading to more attractive opportunities overseas.
Passive funds are unable to take advantage of these opportunities. Another advantage for active fixed income is that certain pockets of risk can be avoided as well. He cites this combination as why active fixed income has outperformed, since it leads to more yield and reduced volatility.
Finsum: Blackrock CIO Rick Rieder explained some of the structural advantages of active fixed income to identify opportunities and avoid pockets of weakness.
The US Department of Labor is proposing a rule to close loopholes around the fiduciary standard. Specifically, they are looking at rollovers from 401(k) plans to IRAs; products not regulated by the SEC such as indexed annuities and commodities; and recommendations to employers on which funds to offer in 401(k) plans.
The SEC raised the bar for financial advice in 2019, applying the fiduciary standard to most types of investments. Yet, there are certain areas where the SEC doesn’t have jurisdiction. However, the Department of Labor does have regulatory authority over retirement accounts.
The fiduciary standard mandates that any investment recommendations need to be made in the best interest of clients and that any conflicts of interest should be disclosed. This has major implications given that nearly 6 million Americans rollover approximately $600 billion into IRAs every year, while 86 million Americans are putting money into their 401(k) plans. Indexed annuity sales were $79 billion in 2022 and expected to easily exceed this amount in 2023.
According to the administration, hidden costs and junk fees are denting households’ retirement savings by up to 20%. However, there is some pushback as critics contend that these rules will lead to more confusion, expenses for compliance, and eventually negatively affect retirement plans and retirees.
Finsum: The Biden Administration is looking to expand the fiduciary standard to cover areas that fall outside of the SEC’s jurisdiction such as commodities and fixed annuity products.
Advisors have to offer personalized solutions for their clients’ financial needs. Of course, this presents an inherent conflict for any advisor who wants to grow their practice as these efforts are often not scalable.
Unified managed accounts (UMA) are a potential solution for advisors to offer low-cost and customized solutions by outsourcing these functions from professional asset managers. UMAs provide an open structure for advisors to toggle between managed account programs, asset allocations, portfolio management, and trading in order to become more efficient and increase the speed of implementation.
Advisors can leverage UMAs to reduce complexity and provide more holistic advice for clients while freeing up time and energy to focus on business development. In contrast to mutual funds or ETFs, UMAs and separately managed accounts (SMA) provide more customization and tax efficiencies. However, SMAs often lead to more administrative burdens since each account generates its own statements, tax documents, and portfolio management needs.
In contrast, UMAs offer access to multiple strategies in a single account while enabling tax savings through tax-loss harvesting. There is more efficiency given that there is less paperwork while also providing a more holistic view of a clients’ financial situation.
Finsum: UMAs can lead to more efficiencies for advisors, leading to less paperwork and tax complications. It also leads to a more holistic view of a clients’ finances.
According to a study of retirement accounts by Fidelity, most older Americans are too heavily invested in the stock market. This is a potential risk especially in the event of a market downturn.
One posssible solution is for investors to increase their allocation to fixed indexed annuities. These are annuities that guarantee the principal but offer more growth potential than traditional fixed-rate annuities. They are best suited for investors with a time horizon of longer than 5 years. They are less risky than equities but offer higher returns than most types of annuities.
Fixed indexed annuities follow a market index such as the S&P 500 or Dow Jones Industrial Average and interest is deposited based on annual gains of the underlying index. However when the index declines, there is no loss of principal or of previously accrued interest.
Of course, there is no free lunch. The drawback is that most fixed indexed annuities have some sort of formula which limits the amount of gains that are captured. There is also a maximum rate of interest which limits the amount of total gains that can be captured. For instance, some have a maximum rate of interest of 12% which means that the annuity would only see a gain of 12% even if the underlying index was up 20%.
Finsum: Fixed indexed annuities are one potential way that older investors can reduce portfolio risk and boost diversification.