Wealth Management
In an article for VettaFi’s Modern Alpha channel, Nick Peters-Golden discussed the outperformance of active fixed income funds in the first quarter of 2023. The entire sector has had strong performance since the end of last year primarily due to decelerating inflation, rising recession odds, and the banking crisis.
As a result, fixed income ETFs saw $52 billion of inflows in the first quarter which is more than 60% of the total $80 billion in ETF inflows. Within the fixed income ETF universe, active bond funds have outperformed as they have been able to take advantage of market volatility and concentrate on shorter-term maturities which have outperformed.
One example is the Kingsbarn Tactical Bond ETF which invests across the credit and duration spectrum in global bond ETFs and Treasuries. This is an outperformer among active bond funds with a 6.2% return YTD. Another outperformer is the First Trust TCW Securitized Plus ETF which invests primarily in mortgage-backed securities that are comprised of private securities and government-sponsored debt. This fund is up 5.2% YTD.
Finsum: Active fixed income funds have outperformed in 2023 and been the recipient of the bulk of ETF inflows.
In an article for iShares, Karen Veraa CFA discussed the opportunity in fixed income ETFs, following the selloff in bonds last year. She notes that assets migrated to the space as investors wanted to reduce risk in their portfolios while taking advantage of attractive yields.
Due to the Federal Reserve’s low rate policies over the last decade, bonds were overvalued and offered paltry yields. This contributed to weakness in the asset class in 2022. But, conditions are turning more favorable as inflation has peaked, recession odds are climbing, and Fed fund futures showing increasing chances of a Fed easing cycle commencing sometime in the second-half of the year.
While the crisis among regional banks is contributing to economic worries, the ‘flight to safety’ into bonds and fixed income ETFs was an indication that the asset class offers diversification benefits.
Another reason to like fixed income ETFs is that opportunities to earn income are substantially higher. Between 2013 and 2021, the only place to earn more than 4% income was with riskier high-yield and emerging market debt. Now, over 70% of fixed income securities are yielding more than 4%.
Finsum: Fixed income ETFs are particularly attractive at the moment given increasing economic worries and generous yields across the sector.
In an article for ETFTrends’ Direct Indexing Channel, James Comtois shared some thoughts from Vanguard executives about direct indexing. In essence, the company sees it as having a bright future and offering significant benefits in the terms of tax-loss harvesting.
With traditional ETFs, investors aren’t able to reap the benefits of tax-loss harvesting. However, direct indexing allows investors to get the benefits of an ETF like diversification and low costs, but they can also sell securities at a loss to offset taxable gains in profitable securities. Subsequently, the sold securities can be replaced with securities that have similar factors to maintain diversification.
These benefits also compound with more frequent scans. So, daily or weekly scans will lead to better outcomes than monthly or quarterly scans. Previously, there were constraints to more frequent scans as an advisor couldn’t monitor portfolios so frequently. But with automated, direct indexing strategies, these services are available to a wider swathe of investors. Overall, more frequent scanning can add between 20 and 100 basis points to a portfolio.
Finsum: Direct indexing offers specific benefits to investors especially when compared to investing in ETFs.
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In an article for SmartAsset, Rebecca Lake CEPF discussed the importance of a workable retirement plan for financial advisors. Many advisors spend their careers helping their clients achieve their financial goals, so they can retire in peace. Yet, they don’t apply the same diligence to succession planning for their own practices.
Instead, advisors should think about the ultimate outcome they want for their business and then work backward to create a plan to achieve that goal. Of course, the plan needs to have some flexibility built in as circumstances can change. But, an end goal is essential to ensure that all of your efforts translate into ultimate success.
The next step is to have a rough estimate of the net worth of your business. This will help you understand how much your practice would generate in the event of sale. In tandem with this, advisors should also ensure that their personal financial planning is on track in terms of retirement planning, disability insurance, life insurance, budgeting, etc.
Following this, you should be transparent about your succession planning with clients and employees or anyone else who could be potentially impacted. Employees want to have some sort of clarity about their careers and potential roles, while clients want to be reassured that they will be in good hands with a new management team.
Finsum: Succession planning is an essential step for financial advisors especially as these decisions will have a major impact on clients and employees.
In an article for USNews, Tony Dong covered how fixed income funds can help investors reduce volatility in their portfolios while producing a steady income. These funds offer the benefits of bond ownership without the costs and complexity. And, it’s especially the case for fixed income classes where markets are less liquid, opaque, and hard to access such as municipal debt and corporate bonds.
These funds also offer benefits in terms of diversification that simply are not possible to replicate for non-institutional investors. The iShares Core US Aggregate Bond ETF is one of his picks as a top bond fund as it is extremely liquid and has very low costs at 0.03%. The fund holds over 10,000 government and high-quality corporate debt, while it pays a yield of 4.2%.
Another option is the Nuveen Floating Rate Income Fund which is an actively managed bond fund. This fund offers higher returns as it tends to invest in shorter-term and lower-quality debt. It also has higher costs with an 0.71% annual expense ratio.
However, active management does offer some benefits especially given recent volatility around rates given increasing levels of financial stress and expectations of a change in Fed policy.
Finsum: Fixed income funds can help investors reduce volatility in their portfolios while generating a steady income.
In an article for LPL Financial, the firm discussed some methods for how financial advisors can build a pipeline of potential clients to ensure the growth and longevity of their practice.
The first step is to identify your prospecting strategy. This entails identifying key goals and metrics for each step of the client journey to ensure that consistent effort and focus is being applied at all stages. There should also be some sort of system to monitor outreach to prospects, quickly follow up, assess whether the prospect is a good fit, and conversion into clients.
The next step is to identify your key values and differentiators. Then, share this with your target audience. This step is critical in helping prospects understand why you chose the profession, and what you stand for.
An important element of this step is to figure out your ideal client and then focus your outreach efforts on this niche. Then, you can brainstorm ways to connect with that target audience whether it's through advocacy groups, social media, community events, etc.
Finally, you should ask for referrals from existing clients as they are likely to have the best understanding of who among their friends and colleagues would be receptive to learning about your approach to helping them reach their financial goals.
Finsum: Financial advisors need to build and nurture their pipeline of prospects to ensure that their practice continues to grow and has longevity.