With yields rising as the Fed pursues its hawkish monetary policy, investors are piling billions into ETFs that track both the short- and long-term treasury market. For example, $13 billion has been added to the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) this year, a product that now offers some of the most attractive yields in over a decade, while having very little interest-rate risk. On the other end of the yield curve, investors have flooded a similar amount into the iShares 20+ Year Treasury Bond ETF (TLT), which has experienced historic losses due to the Fed’s rate hikes. TLT has seen more new inflows than any other fixed-income ETF this year. However, the reasons for these inflows likely differ between the two. Investors seeking yield can now find that in a short-term treasury ETF like BIL, while investors that believe the Fed will slow down rate hikes, or even cut rates in the future, will benefit from the high duration that a long-term bond ETF such as TLT could provide. The steep losses in the market this year have also driven defensive investors into cash-like instruments such as BIL.
Finsum:Investors looking for yield and safety are piling into short treasury ETFs, while investors seeking high duration are flooding into long-term bond ETFs.
Small-cap stocks appear to be having their moment this year outperforming their large-cap peers. The S&P 600 small-cap index is currently on pace to outperform the S&P 500 for the first time since 2016. One reason for their outperformance is a strong U.S. dollar. This is due to the negative effect that a strong dollar has on the profits of multinational companies. A strong dollar harms U.S. companies that sell goods overseas by making them less affordable. Smaller companies, on the other hand, are more insulated from adverse currency effects as most of their business is done stateside. For instance, companies in the S&P 600 index generate only 20% of their revenue outside the U.S, while companies in the S&P 500 generate 40% of their sales abroad. This had led to some of the largest companies in the U.S warning of currency risks in their latest earnings calls. In addition to a strong dollar, small caps are also benefitting from better valuations. According to FactSet, the S&P 600 is trading at 10.8 times expected earnings over the next 12 months, which is well below the S&P 500’s forward price/earnings ratio of 15.3.
Finsum: Small-cap stocks are outperforming large-cap stocks this year due to a strong U.S. dollar and more attractive valuations.
A, um, fixation, among investors this year: the performance of fixed income assets, according to Wells Fargo.
Wells Fargo published several reports on issues playing a role in the challenging environment today. The intent of the executive summary was to address heard often voiced by investors. Some of the top questions revolving around fixed income included:
- What is happening to bonds so far in 2022?
- Why continue to invest in bonds?
- Why is the Fed garnering so much attention this year?
- What should investors expect from the remaining three Fed meetings of this year?
- What does Fed quantitative tightening mean?
- What do you mean when you say, “financial conditions in the economy are tightening”?
- Should we be worried about liquidity in bond markets?
Equity and fixed income markets simultaneously endured negative returns in the first of the year – catching a number of investors off guard. While all major fixed indexes bounced back in July in light of receding yields, year to date, they remain negative.
Inflation? Yep; it’s stuck in gear; that is, elevated. Meantime, the broader economic environment – especially the labor market, has proved to be one tough cookie, according to gsam.com.
”Higher inflation and higher growth volatility are propelling us into a higher yield environment, marking a departure from the post-financial crisis era,” according to Whitney Watson, global head of Fixed Income Portfolio Management, Construction & Risk. “Ultimately, we think this presents opportunities in high-quality fixed income assets, such as investment grade corporate bonds and agency MBS.”
State Street Global Advisors is teaming up with Barclays’ research business to build and manage active products in systematic fixed income. While systematic equity strategies have been around for a while, the strategy is somewhat new to fixed income due to a lack of data. While most stock trades are easy to track, fixed-income trades are typically over-the-counter, with electronic platforms only handling a part of the business. This makes accessing and harvesting data in fixed-income markets more complex. However, that’s changing. Efficiency in the bond markets is increasing the viability of implementing systematic debt strategies. With fixed income, managers attempt to generate alpha through data analysis that uncovers asset mispricing, according to SSGA. This comes as the demand for systematic fixed income is increasing. According to a State Street survey of 700 investors, 91 percent of institutions are interested in using systematic fixed-income strategies over the next 12 months. The survey also showed that investors managing more than $10 billion were most interested in implementing these strategies using investment-grade and high-yield corporate securities.
Finsum: As demand for systematic fixed-income strategies heats up, State Street Global Advisors and Barclays are teaming up to build and manage active systematic fixed income strategies.
According to an index that measures Treasury market volatility, bond volatility is at a level not seen since the peak of the COVID market crisis in March 2020. This is a worrisome sign that the Treasuries markets, which are considered a safe haven for investors, are not functioning as they should. For context, the biggest one-day move for the benchmark 10-year Treasury in 2021 was 0.16. This year, there have been seven days with larger moves. Liquidity is evaporating, which has caused the soaring volatility. A Bloomberg index is currently showing that liquidity in the Treasury markets is worse now than in the early days of the pandemic, while implied volatility, measured by the ICE BofA MOVE Index is near its highest since 2009. This is coming at a time when Bloomberg News reports that the largest buyers of Treasuries, including Japanese pensions, life insurers, foreign governments, and US commercial banks, are pulling back at the same time. Even Treasury Secretary Janet Yellen has expressed concern about a potential breakdown in trading, saying that her department is “worried about a loss of adequate liquidity” in the US government securities market.
Finsum: A lack of liquidity and a pullback in large-scale treasury purchases has triggered volatility not seen since March 2020.
When it comes to direct indexing, a little daylight seems to be peeking in.
As investors, young and old, flock to ETFs, you might say direct indexing’s keeping an eye out for its lane, according to blomberg.com.
Two hands on the wheel, of course.
Questions surface about whether investors have an inclination to dive into direct indexing in light of the burgeoning attraction to ETFs, notes new research from Schwab.
If you have an appetite for index funds and ETFs, but greater control over fund holdings and the possibility to outperform, direct indexing just might float your boat, according to schwab.com.
By paring down costs while stepping up access among investors to different segments of the market, index funds and ETFs have put an entirely new face on investing. That said, when it comes to direct investing, contrary to performance historically, make way for the fly in the ointment: when it comes to control over the fund’s individual holdings, control – perhaps of any sort – is nonexistent.
However, times, it seems, have changed. Limited, back in the day, to institutional and high-net-worth investors, today, direct indexing’s available to a wider range of investors. Why? Technological strides, which have coaxed down investment minimums.
Direct indexing, of course, is surging in popularity, according to barrons.com. While Fidelity, Schwab and Vanguard have initiated direct indexing products over the past year or so, direct indexing’s leveraged by only 12% of advisors. Not to pile on – but piling on – a survey showed, when it comes to direct indexing, half of advisors have too clue what it is.
Um, someone say Wikepedia?