Displaying items by tag: ETFs

David Booth’s Dimensional Advisors hasn’t been a part of the active ETF market for long in fact just a meager 14 months, but that hasn’t stopped it from rising to the top of the active market. Since last November they have rocketed to over $46 billion in active assets. Overall active management is growing rapidly and going to be a trillion-dollar trend of converting mutuals to ETF’s. However, Dimensional’s newly launched active fixed-income is flying off the shelves with nearly $1 billion in assets since their inception in November. While the lion’s share has been converted, this fixed-income segment is among some of the fastest pure growth in the fixed income ETF market.

FINSUM: Within the ETF segment, active ETFs have been growing strongly, and this is at the forefront of a new trend.

Active funds get overlooked by many investors in their retirement portfolios because investors view them with a certain amount of risk aversion. However, rising inflation and positive income expectation make them a viable investment alternative. For global diversity, investors should consider SPDR SSgA Global Allocation ETF and the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF which have unique exposures. For those wanting to maintain fixed income exposure but better yield, First Trust Low Duration Opportunities ETF and First Trust Prefered Securities Income ETF are both debt-focused funds that are great for retirement. Active ETFs have a fee advantage over the often considered mutual funds.

FINSUM: These are great alternatives given the pending interest rate and inflation risk that are both permeating bond markets.

Covid-19’s continued crisis and the growing number of new strands have put lots of pressure on bond markets which has spiked an interest in annuities because there is no yield in fixed income. However, ETFs are looking to capitalize on annuities growing popularity because a defined outcome ETFs offer a lot of the same advantages as annuities. Buffer or defined outcome ETFs use options to track indices which means that by buying a series of put options and selling a series of call options they cap and floor their earnings which means a smooth stable ride that is an alternative to bond markets and annuities as an equity hedge. They also have an advantage over annuities because they don’t have the hefty upfront costs annuities usually have.

FINSUM: This is a great product to hedge the S&P but it isn’t the guaranteed income an annuity provides.

Timing is everything in the market, and investors have a lot of reasons to be cautious in the bond market. A confluence of factors is making it likely that bond yields might jump up in 2022, particularly on longer-duration government debt. This is concerning as bond yields and prices move in the opposite directions so jumping on long-term debt right now could be deadly. For instance, the latest treasury yield rise sent an equivalent of an 800-point Dow Jones plunge in the iShares 20+ Year Treasury ETF (TLT). This is potentially scary as the markets are expecting three 25 basis points hikes from the Fed this year and inflation could also send bond yields rising. Most funds would see between a 1-3% hit on a 30-basis point yield spike.

Finsum: It’s critical to time the market but you might just stay away from long-term bonds, and stay on the shorter end of the duration.

The low rate environment has flipped the paradigm of many investors when it comes to the bond market, and most investors are leaning on higher-yield fixed income ETFs to augment their portfolios. Sure fixed-income ETFs are mainly used as a risk mitigator for most investors, but they also are the way to generate alpha. Investors can better manage the liquidity of Fixed income ETFs as opposed to individual bonds, so they pose fewer liquidity constraints when selling. With liquidity concerns off the table, investors can more freely move securities to look for an advantage of standard indices, hence alpha. On top of this, their broader exposure is a better source of risk mitigation as well.

FINSUM: Being able to flip a fixed income ETF faster than individual bonds is a leg up in decision making, and another reason to cast a wider net in the current fixed income market.