In the face of record inflation, the Virtus Real Assets Income ETF (VRAI) has done extraordinarily well, up 19% year-to-date, and significantly beating the S&P 500, which is up 14%. On top of this, the ETF generates compelling income of 3%, well above the 10 Year US Treasuries at 1.5%.

Investing in real assets is a winning strategy in an inflationary environment because tangible assets such as real estate, natural resources and infrastructure have intrinsic value. VRAI is the first ETF focused on real assets. Additionally, because of VRAI’s focus on income-generating real assets, VRAI also generates attractive income.

In terms of ETF construction, VRAI is designed to be one-stop solution for real asset exposure. VRAI consists of 90 US-traded companies, equally divided between real assets, natural resources, and infrastructure. Companies are filtered based upon market capitalization and selected based upon dividend yield. All stocks are equally weighted to ensure portfolio diversification.

Finally, in terms of costs, VRAI is very competitively priced at 55 bps (0.55%). This stands stark contrast to most energy and real estate ETFs and mutual funds, which typically cost over 100 bps (or 1%).

For more information on the investment case, check out this research piece produced by Virtus

n.b. This is sponsored content and not FINSUM editorial

2024 has seen the stock market make 17 closing, all-time highs. Despite this strength, many are noting some reasons to be cautious about equities due to some concerning developments under the surface.

In essence, the strong performance of the indexes and mega-cap technology stocks is masking hidden weakness. This is reflected in the Dow Jones Transportation Average failing to confirm the new highs of the Dow Jones Industrial Average which is a ‘non-conformation’ according to Dow Theory. Dow Theory warns that a new high by the Industrials but not by transportation stocks is prone to failure. Similarly, riskier parts of the market like high-yield bonds and high-beta stocks are also underperforming Treasuries and low volatility stocks, respectively. 

The leader of this bull market has been technology due to excitement around AI and strong earnings growth from leading tech companies. However, there are signs of exhaustion as the relative ratio of the S&P 500 tech sector has failed to confirm the breakout in the S&P 500. According to David Rosenberg, the founder and President of Rosenberg Research, “These were the most important stocks for the market, and no longer look to be in control.” He believes that the longer these measures fail to confirm the new highs in the S&P 500, the larger the risk of a reversal. 

Finsum: 2024 has been a strong year for the stock market with the S&P 500 making new highs. Yet, there are some signs that the rally may be nearing exhaustion. 

Category: Eq: Total Market 

Keywords: #S&P 500; #bull market; #tech; #equities; #risk; 

Single-stock ETFs were introduced in Europe in 2018 and last year in the US. Now, there are nearly 50 single-stock ETFs with the majority of them tracking mega cap tech stocks like Microsoft, Nvidia, Amazon, and Tesla. Collectively, they have $3.3 billion in assets. Providers include Direxion, AXS, GraniteShares, and YieldMax and strategies fall under option income, bull, or bear.

The largest one is the Direxion Daily TSLA Bull 1.5x Shares which has over $1 billion in assets and tracks the underlying stock with leverage by using swaps and other derivatives. The second-largest at $841 million in assets is the YieldMax TSLA Option Income Strategy ETF. This category of single-stock ETFs will sell call options on the underlying stock to generate monthly income. 

The recent success of these ETFs isn’t surprising given the strong performance of tech stocks this year with many hitting all-time highs. According to Rich Lee, the head of ETF trading at Robert W. Baird & Co., more single-stock ETFs will be hitting the market due to strong demand for these products, and he expects more innovation as well.

The current crop of single-stock ETFs are more suited for short-term speculation rather than long-term investing given higher costs. In August, the SEC issued a warning about these products, “Because leveraged single-stock ETFs in particular amplify the effect of price movements of the underlying individual stocks, investors holding these funds will experience even greater volatility and risk than investors who hold the underlying stock itself,” which encapsulates the risks. 

Finsum: Single-stock ETFs are a small but fast-growing category. While they’ve performed well due to the bull market in tech, they remain unsuitable for long-term investors. 

Congress continues to look for ways to fund the $1.85 trillion bill that aims to spend on social and climate policy. While they have already considered objectives that would align the U.S. with the G20’s global minimum tax rate, the current bill will also affect wealthier individuals’ retirement vehicles. Congress will put limits on large accounts for individuals or couples with $10 million dollar retirement balances. The newest Build Back Better bill also eliminates the ‘backdoor’ Roth IRA by minimizing rollovers and conversions. The date for the former rule change isn’t until Dec. 31, 2028 but the backdoor loophole is set to close Dec. 31st of this year in the current bill.

FINSUM: Substantial changes to savings and retirement could be coming in the upcoming legislation, and investors should be aware of how these changes could affect their retirement vehicles.

The European Stockxx 600 was up .5% on Friday driven by earning releases in the banking sector. That trend followed around the globe as Asia-Pacific’s Taiex index boosted 2% and Wallstreet’s S&P was up 2%. It was strong financial earnings in U.S., and semiconductors in the East pushing the Taiex. All of this happens as inflations concerns continue in the U.S. as consumer prices rose 5.4% on the year, but the Euro areas are seeing the opposite results as monthly inflation was negative in France. The common price thread is definitely in energy prices as Brent crude hit $84.40 a barrel.

FINSUM: The trickling earning reports have generally exceeded expectations. That trend looks to continue, and global portfolios are not only diverse but are outperforming.

The U.S. had two consecutive quarters of negative growth meeting the technical requirements of a recession, and for the first time in over 40 years that coincided with very high inflation. Tasked with generating high returns in a stagflation environment investors are turning to an odd place, emerging markets. While some EM has suffered as a result of a stronger dollar and Fed tightening, pockets are promising to bring big returns in higher growth environments abroad. Countries relying on exports will have a difficult time, but countries like India, Malaysia, and Indonesia all have fairly robust domestic consumer demand and are quick-growing economies. The last country is an oddball but China has continued to deliver stimulus throughout the pandemic and may put itself in a good position to capture investor attention.

Finsum: Equities abroad are ultra-low, finding the right countries with domestic consumer support could be very profitable.

State Street is bullish on fixed income. It believes that institutions should take advantage of attractive yields and that macro conditions are improving, albeit in an uneven fashion. Investors can achieve their diversification, return, and income goals without compromising on credit quality.

Many pensions have been able to close or shrink their funding gaps due to higher yields from Treasuries and investment-grade corporate debt. At current valuations, bonds are able to more effectively function as a hedge against weaker economic growth and serve as an effective hedge against equities. 

State Street sees the economy in a sideways period for rates and inflation. Therefore, it recommends that investors get long duration and see a more favorable environment eventually emerging for borrowers. It forecasts that inflation and Fed rates will end the year lower, providing a tailwind for fixed income.

In terms of active vs. passive strategies for fixed income, State Street takes a nuanced approach. It believes that in certain sectors, capable active managers have proven to add value. But this alpha has been shown to erode over time.

State Street has built a systematic approach towards fixed income which uses a rules-based approach. It weighs factors like value, sentiment, and momentum. It sees considerable benefits to increased electronic trading for fixed income, which has resulted in more data and liquidity. 

Finsum: State Street is bullish on fixed income due to attractive yields and an improving macro environment. In terms of active vs. passive fixed income, it takes a nuanced view.  

The power of – expansion.

That’s what Dimensional Fund Advisors is doing, expanding its exchange traded fund offerings with seven new ETFs, according to thinkadvisor.com.

They come onboard with the US Core Equity 1 ETF and upcoming launches of three global fixed income ETFs and a U.S. Large Cap Vector ETF, which were launched not long ago.

“We continue to evolve our investment offering to meet demand from financial professionals and add value,” Co-CEO and Chief Investment Officer Gerard O’Reilly said in a release. “These ETFs are another set of tools in Dimensional’s growing lineup, which we expect will meet diverse investor needs across asset classes and geographies.”

To build your own ETF portfolio – or discover a one ticket option – you might consider the MoneySense ETF finder tool, according to moneysense.ca.

For jacking up growth, investors can build a core portfolio and delve into other investing options. You can, say, pluck an investment in ETFs with themes. They might range from electric vehicles to artificial intelligence.

Prudential conducted a survey of 198 financial advisors to gain insight on how they are investing and constructing portfolios for retirees. 80% use separate portfolios that are specifically designed for retirees. Additionally, the use of targeted portfolios was higher among advisors who were more knowledgeable about planning for retirement. 

Another takeaway from the survey is that 50% of retirees prefer to live off of income from their portfolios. Thus, advisors need to ensure that their portfolios generate income for clients while balancing other factors like total return and diversification.

In terms of asset classes for retirement portfolios, advisors favored long-term fixed income, US large-cap stocks, and TIPS. Advisors who were more knowledgeable about retirement planning favored long-term bonds and TIPS to a greater degree than less knowledgeable advisors. 

The survey also showed that most advisors are constructing retirement portfolios themselves or with the assistance of third-party recommendations or allocators. Advisors with less knowledge about the subject were more likely to outsource portfolio construction. 

Most advisors are helping clients plan for retirement by optimizing for goals such as flexibility in spending or timeframe. This is in contrast to other approaches, which include using a bucket strategy or segmenting the portfolio into different strategies for different purposes.

Finsum: Prudential conducted a survey of financial advisors. Those with more knowledge about retirement planning favored long-term bonds and tend to use differentiated strategies.

Last year was a terrible year for the markets, even for many hedge funds. According to investment data firm Preqin, hedge fund returns were down 6.5% in 2022, the largest drop since the 13% decline in 2008 during the financial crisis. That’s why global hedge fund managers are preparing for persistent inflation by seeking exposure to commodities and bonds that perform well in inflationary environments. A majority of 10 global asset and hedge fund managers that were surveyed by Reuters said commodities are undervalued and should thrive as global inflation stays elevated this year. In addition, they are also seeking inflation-linked bonds to shield against price rises, and exposure to certain corporate credit, as higher rates restore differentiation in company bond spreads. For instance, London-based hedge fund manager, Crispin Odey is betting inflation will remain high. He told Reuters that "Commodities will start to rise again. They've sold off very heavily and are below operating costs in many instances." Danielle Pizzo, chief strategy officer at Schonfeld Strategic Advisors, told Reuters that her firm “Aims to focus more on investment grade and high-yield bonds this year as well as commodities.”

Finsum:Hedge funds, which saw the largest drop in performance last year since the financial crisis, are concerned about persistent inflation and are seeking exposure to commodities and select bonds.

The IMF estimates that the private credit industry is now over $2 trillion in size, with 75% of it located in the US. It now rivals the leveraged loan and high-yield credit markets in size. Private credit offers borrowers more speed and flexibility and provides higher returns and less volatility to investors. 

While the advantages are clear, the IMF warns that as lending moves away from regulated financial institutions to private markets, systemic risks will increase. With private credit, there is less transparency, price discovery, and information about credit quality. Additionally, there is less information about how various players in the ecosystem are connected. Therefore, the IMF doesn’t see near-term risks but believes that as private credit keeps growing, there will be a need for greater regulation. 

On average, private credit borrowers tend to be smaller and have weaker balance sheets than companies raising money through syndicated loans or public markets. This means more downside risk in the event of rising rates or a negative economic shock. 

Currently, the IMF estimates that ⅓ of private credit borrowers’ financing costs are higher than earnings. It also warns that lending standards have weakened amid increased competition among lenders due to the influx of capital in the sector. 

Finsum: The private credit industry has experienced rapid growth over the last few years and now rivals the size of the high-yield credit and leveraged loan markets. Here’s why the IMF is concerned that continued growth could lead to systemic risks to financial stability.