Markets
February was a bad month for fixed income ETFs which saw $32.2 billion in outflows. This marks the third straight month in a row of outflows. However, fixed income wasn’t the only category suffering in February; many traditional funds like money markets and stock/mixed asset funds saw outflows as well. This is an overall bearish sentiment that is creeping across the market, and signals that investors are worried about future rate hikes for the Fed. However, alternative funds continue to be on a win streak as they had their strongest inflows in over a year and have 11 consecutive months of inflows.
Finsum: There is a stronger correlation with stocks and bonds than there was thirty years ago and many investors are turning away from bond funds in the face of volatility.
2021 was a comeback year for active fixed Exchange Traded Funds. Driving this home was a huge set of inflows as they saw a tenth of inflows globally, many of these came from the US. That trend isn’t stopping as nearly 80% of investors are searching to expand that position in 2022. Many investors see active funds having an edge with global turmoil increasing, as Russia-Ukraine escalates, and there are many macro risks domestically. Additionally, investors are clamoring to buy more ESG ETFs in 2022 as this trend shows no signs of falling off.
Finsum: Markets were messy and pretty hard to predict in the aughts, but active management seems to have a leg up in picking tech growth as well as fixed income winners.
There is nothing like an international conflict to generate a flight to safe assets, and as much pressure as treasury bond prices have taken in the last year, they are still the world’s premiere safe asset. Inflows post Russia’s invasion of Ukraine have lowered Treasury yields and raised bond prices. Additionally it appears that markets are either dubious of the Fed’s rate hikes or just don’t think it will take as many to get the jobs done. Regardless, many bond ETFs, particularly around treasuries have benefited such as the iShares 7-10 Year Treasury Bond ETF and the iShares 20+ Year Treasury Bond ETF which were up 2.0% and 2.6% respectively in the last week.
Finsum: Treasuries are still the global safe asset and they are still in short supply given the abnormally low levels of U.S. interest rates.
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Bond yields have been on a rollercoaster and the market seems to be having trouble making up its mind about the direction. On the one hand investors are fearful over Fed rate hikes and, increasingly, how soaring oil prices will drive up inflation. On the other hand, there is an element of anxiety that the war in Ukraine might scuttle global growth, which would point towards lower yields in the future. Perhaps the worst outcome though is both: stagflation.
FINSUM: In our view, the whipsawing of yields is misguided. Oil is not a big enough component of the economy to cause inflation to spin out of control and if you compare the macro outlook of today to three weeks ago, it is clearly more bearish. Thus, we think yields will trend downward so long as this conflict continues.
2021 was an all-time year for active fixed income launches, and 2022 is looking to continue that pace. Capital Group just debuted another active fixed income ETF to capitalize on this financial trend. The Capital Group Core Plus Income ETF (CGCP) will seek a higher income return for a traditional bond fund and really seek to maximize total return. With a wide swath of debt available in their targets, they can invest over a third in below investment grade securities. This launch comes amid 5 other active equity fund launches for Capital Group. Overall investors are looking for more alpha return in their portfolios and are looking to active management to find it.
Finsum: Macro factors are pushing more investors into active bond funds, with increased interest and inflation risk core analysis is more effective than ever in fixed income.
Fixed-income investors are in the doldrums when it comes to today’s ultra low yield environment. Guaranteed income from CDs is just not high enough, and while bonds may be secure their value is at a valley. Laddering annuities is maybe the best strategy, but the questions are under duration. In a flat yield curve going for a short duration makes sense, and as the yield curve steepens moving to long-term contracts is more attractive. In today’s interest rate market, the goldilocks spot is around 5-years, it is a much higher return than shorter-term annuities and longer-term contracts tie your money up without much more of a return boost. The best part is you can integrate this annuity laddering strategy into IRAs and take advantage of all the tax solutions they bring to the table.
Finsum: It's critical to ladder the right duration depending on the current rate environment and given how much interest rate risk there is today it's more important than ever to be precise.