Markets
The ETF sell-off is rampant as a response to the wild and sudden market volatility, but its time to get rid of your fixed income funds? Some experts are saying there is a breakdown in the traditional 60-40 portfolio, but outflows aren’t present yet at the rate in bond funds. This is despite funds like AGG being down over 10% YTD. One possible reason for this is that investors are more worried about macro factors than most other factors. Over a third of advisors are worried about inflation, rates, and geopolitics whereas only one in ten are as concerned with volatility. This is could cause a shifting of flows into more stable macro flavored products like bond funds.
Finsum: We’ve said it once we can say it again, bond fund holders aren’t eyeballing returns like equity ETFs they are holding for security.
There has been a sharp uptick in the high-value bond ETF trades in the last 12-months which most investors are attributing to activity from large institutional investors. Transactions are up as much as 36% on some platforms from the previous year. This has been part of a longer more ongoing trend that has been successful for many bond funds. Since the GFC, investors have questioned the resiliency of these funds to economic downturns, but regulators and investors alike are pleased with their performance in the covid pandemic. Just as important to this is the support from the Fed and Fiscal policy to the economy. Stepping in with bond relief has helped these ETFs. Finally, the increase in investment in bond ETFs has actually led to tighter underlying spreads in bond markets themselves and reflects better liquidity.
Finsum: Many believe that over-investment in index funds could be disruptive to equity volatility over time, but it appears to be stabilizing bond spreads.
Macro conditions have left many investors skittish regarding the future of fixed income funds, but BlackRock is firm in its belief in the future of Fixed Income ETFs. BR said that despite headwinds from rising rates and inflation they expect bond ETFs to surpass $2 trillion in the next year and a half and to hit $5 trillion by 2030. While the current environment doesn’t make investors ecstatic about the bond market future, many overlook the traditional role they fill in a portfolio: stability. That resilience especially during volatility and the ultra-low rate environment has proved useful enough for many investors.
Finsum: ETF trends have been amplified by the pandemic and will be enduring moving forward.
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AllianceBernstein is moving forward with the development of two new ETF products and they are meeting the demands of the market. There has been a sharp uptick in active management particularly in the bond ETF segment in the post-pandemic environment. The predominant view is that managers are better suited at picking winners with macro-flare proving so effective. The two portfolios they are launching are coming in an ultra-short income offering which will have a combination of government and investment grade corporate debt. As well as a tax-aware short-duration ETF. There has also been a shift towards shorter duration bond funds as a response to a rise in interest rate risk.
Finsum: With the Fed stomping on the gas pedal, if inflation comes under control quickly longer duration debt could be under-priced.
Financial companies are rushing to deliver low initial investment direct indexing products to investors, but is DI here to stay? The benefits of custom indexing are obvious: It gives ESG investors an opportunity to punish the greenwashers of their own volition, and optimizers a chance to gain tax alpha easily. However, this isn’t free; investors usually pay much higher fees than traditional ESG funds and the minimum investments are usually high. For the few funds without high initial investments, investors get very little if any flexibility in dropping assets from their portfolio. Now they aren’t an ‘active- wolf’ in sheep's clothing, but those are real drawbacks investors should consider. In the long run, we will see a combination of lower fees with more accessibility as competitors enter the market, and direct indexing could be here to stay.
Finsum: Direct indexing isn’t for everyone…for now, but as fees shrink, and minimums drop more investors should consider adding them to their portfolio.
State Street launched a new fund LQIG which started trading on May 12, an effort to give investors exposure to liquid bonds with high traceability. The market is rife with turmoil, and investors are looking to different fixed-income products to provide an inflation-beating yield and relatively liquid assets. The fund seeks exposure to 400 investment-grade corporate bonds denominated in dollars. These differ from most fixed-income funds which are designed to give broader market exposure that doesn’t prioritize traceability. The high traceability comes with lower bid-ask spreads as well as more transparency into their holding's real-time valuations.
Finsum: Investment-grade corporate debt is looking relatively more attractive with market volatility at such highs.