Fidelity Investments launched a new active fixed income ETF this week, the Fidelity Low Duration Bond Factor ETF (FLDB). The ETF will invest 80% of its assets in short duration, investment-grade debt, consisting of floating rate notes and Treasuries, with a fee of 20 basis points. It seeks to balance credit risk and interest rate risk while outperforming benchmarks. 

Greg Friedman, Fidelity’s head of ETF management and strategy, noted, “It’s an asset class within fixed income that did not have any coverage until this morning. It fits a client's need to have that short duration exposure to a broad-based market of fixed income products.” 

Fixed income ETFs are experiencing a boom in terms of new issues and inflows. According to Tony Kelly, the co-founder of BondBloxx, assets in fixed income ETFs will reach 40% by the end of the decade from 20% currently. Active ETFs are finding traction as they allow for specific thematic exposure without sacrificing liquidity. Last year, assets under management for active ETFs increased by 37%. 

Fidelity is also jumping on the trend. In addition to launching FLDB, it debuted the Fidelity Fundamental Large Cap Value ETF (FFLV).  Its new line of ‘Fundamental suite ETFs’ will be active as it will utilize a quantitative overlay to their typical process. In total, Fidelity has 66 ETFs with $55 billion in assets under management. 

Finsum: Fidelity is betting big on active ETFs as it launched 2 new ones this week. Investors have been receptive to these products as it gives them narrow exposure in a liquid vehicle. 

Last year, real estate transactions declined by 50%, while cap rates increased by 80 basis points. Many sellers were unwilling to let go of properties at lower prices, while buyers contended with a higher cost of capital and macroeconomic uncertainties. Another headwind was that many banks pulled back from lending due to balance sheet concerns, following the regional banking crisis.

This year, KKR is forecasting that real estate transactions will pick up, and there will be many opportunities for investors. Additionally, private real estate investors are well-positioned to step into the vacuum and provide financing for high-quality real estate at attractive terms. 

KKR notes some catalysts that should result in transaction volume increasing. The firm believes that real estate values are near a bottom especially as the Fed is at the end of its hiking cycle and looking to cut in the coming months. 

It also notes that REITs are a leading indicator for private real estate and have already embarked on a robust rally. Further, many real estate private equity funds have ample cash and have been on the sidelines for the last year and a half. Finally, many owners and operators will be forced to sell given that many loans are due to be refinanced in the coming years. In total, $1.6 trillion of real estate debt will be maturing in the next 3 years. 

Finsum: Over the last 18 months, activity in real estate has plummeted. KKR believes that we are close to a bottom. It sees attractive opportunities for private real estate investors especially given that many loans will need to be refinanced in the coming years in addition to an improvement in macroeconomic conditions.

Following the collapse of First Republic, many believed that there would be a negative impact on financial advisor recruiting. However, this concern was unfounded as more than 9,600 experienced advisors switched firms last year, which was a 7.5% increase from 2022 according to a report from Diamond Consultants. 

Jason Diamond, executive VP of Diamond Consultants, authored the report. He considers an experienced advisor to be one with a minimum of 3 years of experience. He believes that the healthy recruiting figures reflect that advisors are ‘taking a long-term view of the business in terms of what move will best position them for the next five years, not just today.” 

The two biggest moves were a team from UBS, managing $5.5 billion in assets, moving to RBC, and a private banking group at Bank of America, advising on $4.5 billion in client assets, joining Fidelis Capital, an independent wealth management practice. 

Most moves were within the same channel, such as wirehouse to wirehouse, even though many headlines focus on large teams going independent. For 2024, expectations are for another strong year of recruiting, although weakness in financial markets could lead to less activity. Many wealth management firms now offer multiple affiliation channels for incoming advisors. Additionally, private equity has also been getting more involved which has also pushed valuations higher. 

Finsum: Many thought that financial advisor recruiting would drop off in 2023 following the collapse of First Republic. However, this was incorrect as recruiting was up 7.5% compared to 2022. Expectations are that recruiting in 2024 should be strong as well.  

US Treasuries continue to move lower as hopes for a pivot in Fed policy are eroding. From the start of the year, the yield on the 10-year has climbed from 3.9% to above 4.3% to reach their highest levels since November. In total, it has retraced nearly half of the rally that began in October of last year. 

Over this period, the number of rate cuts expected in 2024 has declined from 6 to 3 as has the timing. Primarily, this is due to the economy remaining strong as evidenced by the labor market and inflation that has proven to be more entrenched than expected. All in all, the narrative has certainly changed as some now believe the Fed may actually hike rates further especially as there are indications that the steady decline in inflation has ended. 

Minutes from the last FOMC meeting also showed that committee members are concerned about the risk of inflation re-igniting if it begins to cut too soon. Overall, it remains ‘data-dependent’. However, all the recent data has undermined the case for immediate or aggressive cuts. According to Rich Familetti, CIO of US fixed income at SLC Management, the current Fed stance "is going to make it very hard for rates to fall much further from here… The pain trade is at higher rates and we will likely experience that."

Finsum: Treasuries continued their losing streak as higher interest rates have weighed on the entire fixed income complex. The market is now expecting 3 cuts in 2024 down from 6 at the start of the year.

2023 was a unique year as nearly every asset rallied due to positive news on inflation, an economy that remained resilient, and expectations that the Fed is ready to pivot on monetary policy. Looking ahead, 2024 is certainly going to be more challenging for equities and fixed income.

JPMorgan believes that investors should have exposure to private market as they offer steady returns and can increase diversification. The bank notes that private equity has outperformed public markets over multi-year periods regardless of economic conditions. The asset class has recently faced headwinds due to interest rates increasing the cost of capital. It recommends focusing on private equity funds that less leveraged and focused on higher-quality companies with durable growth characteristics.

While the monetary environment poses some challenges, it also creates opportunities for investors to lock in attractive yields in private credit. Commensurately, many banks have pulled back from lending, following the regional banking crisis, while public market debt issuance has also been constrained. Private credit has stepped into the vacuum to provide capital for these borrowers while also structuring loans to provide more protection in the event of a default. The bank notes attractive opportunities in commercial real estate, floating rate debt, and leveraged loans.

Finsum: JPMorgan anticipates more volatility and a more challenging environment in 2024 than last year. It sees upside in alternative investments to boost returns and diversification.