Wealth Management
We are seeing a flurry of active fixed income ETF launches over the past few months. While it’s nearly settled that with equities, passive tends to outperform active strategies, active fixed income strategies have performed better than passive fixed income especially in recent years.
Further, there is considerable uncertainty around the economy regarding rates, inflation, and a potential recession which could lead to more opportunities for active managers. Additionally, active managers have more latitude in terms of duration and credit quality.
Therefore, money is flowing into active fixed income ETFs from mutual funds and passive bond funds. For Barron’s, Lauren Foster discusses whether these inflows into active fixed ETFs will continue or is it just a short-term fad.
Money is likely to also flow into active fixed income ETFs from active fixed income mutual funds given that the ETFs offer several benefits such as lower fees, more transparency, and intraday liquidity. The younger generation of investors also tend to favor ETFs rather than mutual funds due to higher comfort levels and an understanding of how high fees can impact long-term performance.
However, the ultimate factor is whether these ETFs will continue to deliver strong returns relative to passive fixed income ETFs and active fixed income mutual funds. So far, they seem to be offering the best of both worlds to investors.
Finsum: A major theme in 2023 has been the rise of active fixed income ETFs. But, there is considerable doubt whether these will gain traction and are better than passive fixed income ETFs or active fixed income mutual funds.
Strive Asset Management, an upstart competitor to Blackrock and Vanguard, is launching its first fixed income ETFs. Strive is based in Ohio and was founded in 2022 by Vivek Ramaswamy who is now running for President in the Republican Primary. Ramaswamy resigned from the firm earlier this year to focus on his political ambitions, but Strive’s mission and his political campaign clearly have some overlap.
Ramaswamy and Strive are both defined by their opposition to ESG investing and believe that it’s a detriment to investors and the country. Therefore, he’s been critical of asset managers like Blackrock and Vanguard who use their passive stakes in companies to encourage management teams to consider ESG factors when making decisions.
In contrast, Strive and Ramaswamy believe that companies should focus on maximizing profits rather than other factors. Its first 2 fixed income ETFs are the Strive Enhanced Income Short Maturity ETF (STXT) and the Strive Total Return Bond ETF (BUXX). STXT provides total exposure to fixed income with a cost basis of 49 basis points, while BUXX is designed to generate yield for investors by investing in short-duration bonds and charges 25 basis points.
Finsum: Strive Asset Management is launching its first 2 fixed income ETFs. The company differentiates itself by eschewing ESG and rewarding companies that don’t use these metrics.
It’s often remarked that demographics are destiny. Like most developed countries, the US has an aging population with about 10,000 Americans reaching retirement age every day. And over the next decade, more than 20% of the workforce will reach retirement as well.
The issue is even more stark for the financial advisor industry with the average advisor in the 50s. For advisors in this age group, it’s necessary to start thinking about succession planning for multiple reasons.
For one, a successful exit requires the same type of planning and intention that an advisor helps clients with in order to reach their financial goals. Second, proper succession planning can ensure that you will maximize the value of your practice when you are ready to retire. Finally, it’s an important signal to prospective and current clients that you are committed to their success even if you may no longer be an active part of it.
The first step is a continuity plan which details what happens to the practice in the event of a death or disability. The second step is to investigate various options. Recently, a popular option for smaller firms is to sell but then continue to work as an employee for a couple of years to ensure a smooth transition.
Regardless of what you choose, it’s important to keep your clients updated about succession and continuity plans. Ideally, you can meet with your clients and their new advisor multiple times before the final transition.
Finsum: The financial advisor industry is approaching a demographic cliff. For a variety of reasons, it’s important for advisors to start succession planning.
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Until a couple of years ago, the standard playbook for any investor looking to secure their retirement was a mix of stocks and bonds. But, this traditional style is being challenged especially as stocks and bonds have fared poorly in today’s world of stubborn inflation and high rates.
This challenging environment is leading to more interest and demand for alternative investing especially as the asset class provided diversification and healthy returns in 2022 when both stocks and bonds were down double-digits. For Kiplinger’s, Tory Reiss covers the pros and cons of alternative investing for prospective retirees.
In terms of the drawbacks, Reiss mentions a lack of liquidity which means that prices can drop especially during periods of market volatility especially in less mature markets. Another is that these investments typically have higher fees and costs which can undermine long-term performance. Further, there is less transparency and regulation in the space which means that there is more risk.
However, there certainly are some positives such as the increase in diversification especially in rising-rate environments which have proven to be headwinds for stocks and bonds. There is also a potential for greater returns while also providing a hedge against inflation.
Overall, investors should be open to some allocation to alternatives but should understand the risks and conduct proper due diligence especially in newer asset classes with less of a track record and regulatory framework.
Finsum: Alternative investments performed well in 2022 while stocks and bonds both saw steep losses. This is resulting in a surge of interest in the asset class. Here are some pros and cons to consider.
In a strategy note, Scott Solomon and Quentin Fitzsimmons, the portfolio managers of the Dynamic Global Bond Fund, discuss why active fixed income is the best asset class for the current market environment. Despite recent economic data which indicates that inflation and the economy are both more resilient than previously expected, the pair believe that we are in the midst of a shift from one monetary regime to another.
However, they acknowledge that this is not going to be a smooth process. In fact, they expect a bumpy process especially given investor positioning. But, this uncertainty is what they believe will create opportunities in terms of credit quality and duration. Of course, such opportunities can be taken advantage of better by active fixed income managers rather than passive funds which are tracking benchmarks and unable to invest in securities of varying quality and duration.
Soloman and Fitzsimmons see a new ‘normal’ and expect rates to be structurally higher over the next couple of decades given high levels of debt to GDP in developed countries all over the world. Additionally, they anticipate that the negative correlation between stocks and bonds which prevailed in the years between the 2008 financial crisis and the pandemic is unlikely to return as long as central banks are not actively supporting markets.
Finsum: Scott Solomon and Quentin Fitzsimmons of T. Rowe Price’s Dynamic Global Bond Fund shared their thinking about why they expect active fixed income to offer the best opportunities in the coming years.
July saw a slowing of inflows into fixed income ETFs, while inflows into equity ETFs ramped higher. $17 billion flowed into bond ETFs which was dwarfed by the $43 billion of inflows into equity ETFs. For the month, the 3 most popular fixed income ETFs were the iShares Core US Aggregate Bond ETF, the Vanguard Total Bond Market ETF, and the iShares 20+Year Treasury Bond ETF.
This isn’t totally surprising given the poor performance of bonds in recent months due to a surprisingly resilient US economy which is leading to increased odds of more hikes and higher rates for longer and decreased odds of a Fed rate cut and continued cooling of inflation. In contrast, equity markets have been on fire with the S&P 500 now closing in on it's all-time highs from January 2022 while many tech stocks and indices are already at new highs.
Overall in 2023, the share of inflows has been pretty balanced between fixed income and equity ETFs which is a new development as typically equity ETF inflows dominate. This is largely due to investors wanting to take advantage of higher yields and advisors and institutions becoming more comfortable with fixed income ETFs.
Finsum: There was a slowdown of inflows into fixed income ETFs in July due to increasing volatility and more uncertainty about the Fed’s rate hike path.