Markets

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.

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.

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