Displaying items by tag: credit

According to Bloomberg data, the iShares iBoxx $Investment Grade Corporate Bond ETF (LQD) saw $3 billion in outflows on Monday, its largest one-day outflow since the fund’s inception twenty years ago. The exodus was quite the reversal for LCD as the ETF saw six straight weeks of inflows. The fund was up 9% between October 20th and Friday, with investors pouring money back into credit with the hope that the Fed might slow down the pace of rate hikes. However, those hopes fell as St Louis Fed President James Bullard warned that “markets are underpricing the risk that the central bank will have to be more aggressive rather than less aggressive.” In response, LQD dropped 0.7% on Monday, its worst performance in over a month. As of Monday’s close, the ETF was down 19% for the year, its biggest loss ever. Peter Chatwell, head of global macro strategies trading at Mizuho International told Business Insider that “The fund’s recent rebound likely exacerbated the withdrawals as year-end approaches. Clearly, at this time of year, some money gets taken out of the market, particularly if performance has recently been strong, which with LQD it has.”

Finsum:LQD saw its largest one-day outflow ever as St Louis Fed President James Bullard warned that the Fed will need to become more aggressive, not less aggressive.

In a recent article in FT Adviser, Lumin Wealth Investment Manager Elliott Frost wondered how much alpha left is in active fixed income. Frost believes that a fixed income allocation should include a strategic mix of active and passive management. He notes that active fixed-income managers have generally outperformed passive strategies in the fixed-income space due to several reasons. The first is that companies with the most debt typically make up the largest component of a fixed income market index, leaving the portfolio more exposed to unfavorable changes in credit. Another reason is the lack of risk mitigation. Passive managers cannot “dial up or dial down risk.” However, he noted that the alpha generated by active managers has been to some degree, due to a long-term overweight on credit. Frost believes that if we account for a manager’s credit exposure, fees, and other factor exposures such as volatility, there might not be much alpha left. This is why he recommends not putting “all your eggs in one basket” and incorporating a passive fixed index into a portfolio for cheap access to a liquid market.

Finsum: Lumin Wealth’s Elliott Frost wonders if there is much alpha left in active fixed income once a manager’s credit exposure, fees, and volatility are accounted for.

According to a recent report by Fitch Ratings, U.S. insurers are expected to continue to increase their fixed-income ETF holdings. In December, New York introduced new guidelines that allowed a fixed income ETF to receive bond-like capital treatment if the ETF is rated by a nationally recognized statistical rating organization. However, if rated, an ETF can receive this treatment only if it is invested in fixed income securities and cash, is passively managed, and has at least $1 billion in assets under management, among other criteria. So far, Fitch has rated 10 fixed-income ETFs from VanEck, Vanguard, and Invesco. Insurers have previously sought to increase their ETF holdings due to a mix of diversification, increased liquidity, and the ability to adjust overall portfolio allocations. According to SNL data, ETF holdings at insurers jumped from $3 billion in 2016 to $9.8 billion at the end of 2021.

Finsum:Since New York introduced new guidelines that allowed a fixed income ETF to receive bond-like capital treatment, insurers have been increasing their fixed income ETF holdings. 

A manager at Artemis believes now is the perfect time to consider active fixed income solutions. Grace Le, who co-manages the Artemis Corporate Bond Fund, told Financial Times that an active bond manager’s job is to protect their clients during uncertain times and that is exactly what we are experiencing now. She believes that the reversal of quantitative easing led to more volatility in bond markets, resulting in a “boon for active investors.” Investors are dealing with inflation, macroeconomic uncertainty, and the potential for a recession. Muzinich & Co's co-head of public markets Michael McEachern told the publication that active managers can invest in shorter-duration bonds less impacted by increasing rates and rotate into higher-quality credit that is less sensitive to the current environment. Managers can also avoid concentration in a portfolio and deploy carry trades, which means borrowing at a low-interest rate and investing in an asset that provides a higher return.

Finsum:According to two bond fund managers,investors should consider active fixed income in times of economic and market uncertainty. 

Saying the bond market is difficult would be more than an understatement, and while yields are creeping it's still hard to get the historic performance. However, many investors are turning to active fixed income ETFs. This has led to a swelling of inflows into the market category making up 16% of ETF inflows in 2021 through October. Turmoil at the Fed and the continual threat of a taper tantrum have many investors looking to pros to sort out the difficulties in the bond market. Active FI ETFs can also fit narrower targets and accommodate the rapidly shifting macroeconomic environment.

FINSUM: Seasoned veterans at the helm make the most sense when the environment is shifting, and active ETF can edge out when the future is uncertain.