Displaying items by tag: ETFs

A major development in 2023 was the boom in active fixed income ETFs as measured by inflows and launches of new ETFs. Some reasons for interest in the category include opportunities for outperformance, lower volatility, and diversification. Ford O’Neil, fixed income portfolio manager at Fidelity Investments, sees structural reasons for the asset class’s recent success and believes it will continue.

According to O’Neil, there is more potential for outperformance in active fixed income vs equities, because indices only cover about half of the total bond market. In contrast, equity indices encompass a much larger share of the entire stock market. This means that the market will be less efficient, resulting in more undervalued securities. 

Active managers are also able to better navigate the current landscape, where there is considerable uncertainty about the economy and monetary policy given more latitude when it comes to security selection. He notes that active fixed income ETFs have delivered strong outperformance vs passive fixed income ETFs over the last 8 years. 

He stresses that identifying these opportunities is dependent on proper fundamental research and quantitative analysis followed by effective implementation. O’Neil is the co-manager of several active fixed income ETFs including the Fidelity Total Bond ETF (FBND) or the Fidelity High Yield Factor ETF (FDHY).

Recent economic data and tea leaves from Fed officials have resulted in more challenging conditions for fixed income. Essentially, there is much less certainty about the timing and direction of the Fed’s next move as economic data and inflation have been more robust than expected. 

According to Michael Arone, chief investment strategist at State Street, this presents an opportunity with high-yield bonds given that yields are at attractive levels while a strong economy indicates that defaults will remain low. So far this year, high-yield bonds have outperformed with a slight positive return, while the iShares Core US Aggregate Bond ETF (AGG) and Vanguard Total Bond Market ETF (BND) are down YTD.

This is a contrarian trade as high-yield bond ETFs have had $387 million of outflows YTD, while fixed income ETFs have had $2.8 billion of net inflows YTD. It’s also a way for fixed income investors to bet that the US economy continues to defy skeptics and avoid a recession despite the Fed’s aggressive rate hikes. 

Currently, high-yield bonds have an average spread of 338 basis points vs Treasuries. Many of the most popular high-yield ETFs have effective durations between 3 and 4 years which means there is less rate risk. Spreads have remained relatively tight and could widen in the event of the economy slowing. 

Finsum: High-yield ETFs are offering an interesting opportunity given attractive yields. This segment of the fixed income market also is benefiting from recently strong economic data which indicates that default rates will remain low.

The highly anticipated launch of Bitcoin exchange-traded funds (ETFs) in early January was met with a wave of excitement, with investors eager to gain exposure to this burgeoning asset class. However, their enthusiasm was quickly dampened as Bitcoin's price took a hit, dropping nearly 13% in the following days.

Despite the rocky start, a sense of cautious optimism has returned to the ETF space. Bitcoin's recent price surge has reignited investor interest, fueling a significant increase in inflows into these funds. CoinShares, a leading crypto asset management firm, reported (02/19/24) a record-breaking $2.4 billion flowing into Bitcoin ETFs last week, representing a remarkable turnaround.

This renewed demand presents a unique challenge for financial advisors. With clients increasingly inquiring about the potential role of Bitcoin ETFs in their portfolios, advisors need to navigate the complex landscape of this new asset class. While these ETFs offer a convenient way to gain exposure to Bitcoin, their inherent volatility demands careful consideration. Unlike traditional investment options, Bitcoin exhibits significant price fluctuations, making it a riskier proposition for many investors.

Finsum: Bitcoin ETFs got off to a rocky start in January, but flows into these funds are recovering remarkably as the cryptocurrency’s price soars.

Morningstar recently completed its annual review of the US Model Portfolio Landscape. It noted that assets under management (AUM) in model portfolios reached $424 billion, a nearly 50% increase over the last 2 years. 

Some of the drivers of growth include enabling an easier investment process, providing access to institutional investors’ insights, and increased fund selection. It allows advisors to outsource elements of the investment management process to the extent that they feel comfortable. The net benefit is that it allows for more time to be spent on client engagement, financial planning, and growing the business. 

Another factor is lower costs. On average, model portfolios are 19 basis points cheaper than comparable mutual funds. In terms of market share, Blackrock and Capital Group are the leaders with $84 billion and $75 billion, respectively representing 37.5% of total AUM. Launching of new model portfolios has slowed as there is saturation in many areas like income, ESG, passive, or active. Instead, new launches are predicted to focus on greater customization such as optimizing tax efficiency.

Finsum: Model portfolio AUM has risen by nearly 50% over the last two years. Reasons for growth include easing the investment process management process for advisors, lower costs, and a greater variety of options.

Fixed income investors have had to deal with considerable volatility over the past couple of years. The asset class has provided investors with generous yields between but has not lived up to its potential in terms of moderating portfolio volatility and serving as a counterweight to equities. 

In the near term, this volatility is likely to persist especially given uncertainty about the economy and interest rates. Due to these circumstances, fixed income investors should consider actively managed ETFs which are better equipped to navigate these conditions. Active managers are able to optimize holdings and take advantage of opportunities that are unavailable to passive managers. 

Not surprisingly, active bond funds have outperformed since 2022 when interest rate volatility started spiking. Yet, many advisors have been slow to embrace active fixed income ETFs. Some have stuck to actively managed mutual funds instead. According to Capital Group, 80% of assets in fixed income mutual funds are actively managed, while only 12% of assets in fixed income ETFs are actively managed. 

Actively managed ETFs offer advantages such as lower costs, more liquidity, and tax advantages. Capital Group attributes slow adoption to a lack of awareness of the benefits of active fixed income ETFs and limited supply among advisors. To this end, it’s investing in educating advisors about why they should consider actively managed fixed income ETFs over other options. 

Finsum: Active fixed income ETFs have many advantages over passive fixed income ETFs and actively managed fixed income mutual funds especially in the current environment. Yet, adoption has been slow for a few reasons.