Markets
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.
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.
More...
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.
The Fed had its largest hike in two decades, and the ECB has gone ultra-dovish. This has sent a huge influx of Euro area investors into U.S.-short-durations bond ETFs. Funds like the iShares 3-7yr UCITS ETF had over $600 million in inflows last week. Short-duration corporate debt was also favored by euro area investors. Overall the bond market had seen an exodus in the previous weeks but this confluence of factors has been enough to entice investors. While the Fed has made up its mind they have contributed to inflation, bank heads in Europe are mixed which will leave policy to be accommodative for the near term.
Finsum: The Fed could be over-reacting and Europe could be under-reacting to inflation, but if Europe doesn’t tighten they will find their bond market in a similar position to the US a couple of weeks ago.
Markets are in turmoil which has investors looking for more secure options, but American bonds are a risky option with rising yields (falling prices), which means active international is in a good position. Over the last year, 82% of active bonds have outperformed, and while that doesn’t hold up in the long run the unique conditions put them in a good position. International bonds can offer less interest rate risk, already better yields, and comparable credit profiles. The added advantage of international active funds is investors can make hedges with currency trading which can allow investors to hedge or leverage for more potential gains.
Finsum: The Fed will continue to put pressure on both bonds and equities in the U.S., and investors need a backup plan.