Edward Jones and LPL are two industry titans in terms of total advisor employment, but these firms are moving in drastically different directions when it comes to talent acquisition and development. Once Jones had a 30,000 advisor target but since the pandemic, they have scaled back recruitment efforts and shifted strategy. This had their numbers dwindle by 2% year over year to 18,823 brokers. LPL on the other hand has doubled down on recruiting efforts and saw its head count surge by 15%. What drove this growth was a combination of new recruiting models and full-service firms and acquisitions. However, despite losing advisors Jones saw revenue grow by 22% from 2020 to 2021, because the rising markets increased the fee-based revenue.

Finsum: There are lots of transitional costs from squirting new talent: training, legal, etc in the short run this can eat at the bottom line when trying to grow.

Capital gains taxes vary based on a lot of factors. Those dwelling in California for example may pay up to capital gains like regular income for their state taxes, which can be brutal. However, variation in income and holding duration play a large part in the total expected payments for cap gains. Finally, medicare surtaxes for those couples with over a quarter of a million in income will face additional capital gains taxes. Investors should take early precautions at the beginning of 2022 to consider how to mitigate their tax bill for the upcoming year with tax-loss harvesting. Realizing certain losses in the middle of turmoil can minimize your final tax burden.

Finsum: There are great advantages in tax-loss harvesting that you can take advantage of in crypto still, and now might be a perfect time.

Everyone and their dog has been pivoting to ultra-short duration pseudo-cash bond ETFs in the fixed income balance of their portfolio and this is causing a sell-off of lots of corporate bond ETFs. LQD saw its fifth day of outflows which set a pandemic era record. This brought together a total of $856 million in investor outflows. This is part of a blogger trend where sentiment around investment-grade bonds is weakening. However, it's not because they are less likely to pay back but more a reflection of investment-grade corporate debt generally having a longer duration, which is the risk investors don’t want with upcoming rate hikes.

Finsum: The risk premium hasn’t changed with corporate debt just the term structure risk. Fundamentally these bonds could still be in a good place.

ESG ETFs continue a fire streak and every single Wallstreet mainstay is launching funds as fast as they can. Goldman launched their latest fund this week Goldman Sachs Bloomberg Clean Energy Equity ETF which will be traded with the ticker GCLN. It will hopefully capitalize on the US transition to clean energy with a strong focus on equities. ESG has a strong track record as last year 13 ESG index funds with large caps crushed the S&P 500 with an almost 30% return. Goldman thinks the ESG movement is just in its infancy and this fund is a long-term strategy.

Finsum: The rapid growth in ESG funds is starting to teeter on bubble territory, but that bubble could pop a long time from now.

That's correct, Joe Biden’s latest economic rebrand is really a diet version Ronald Reagan era policy. In a recent statement, Joe Biden said that in response to inflation we can either “increase the supply of cars” or “reduce demand for cars by making Americans poorer”. This is essential supply-side economics made famous by the Reagan administration. Additionally, Yellen coined the term ‘modern supply-side’ economics just two weeks later in order to push the Build Back Better bill. This is a liberal tilt on aiding the weakening supply chains that will hopefully strengthen the economic recovery. It's a response to republicans’ attacks that BBB will surge debt and inflation.

FINSUM: The economy is in a difficult place, there is still catch up needed but undoubtedly Americans are feeling the force of inflation and another stimulus package could only further that problem.

The latest data from MSCI Inc. regarding the environmental social and governance criteria gave updates to America’s largest Financial companies like Wells Fargo, Citigroup, and Morgan Stanley. However, some are accusing rating agencies of ‘greenwashing’ the criteria because these same companies lent a combined $74 billion to fossil-fuel companies. This is the exact reason the SEC is looking to step into ESG ratings in one of their latest announcements. In fact, only 3 lenders in the S&P 500 received ESG rating downgrades. This is mostly because MSCI only considers the fraction of loans to polluters, not their total value.

FINSUM: Total existing outward loans might just be a way the SEC could come down on future ESG rating regulation if these stories gather more headlines.

BlackRock's active management has long been the forgotten investment in the firm's giant ETF basket they manage, but things are starting to turn. While the index business hit $10 trillion in the last quarter it was the active funds dring the fee growth in fact in the last quarter of 2021 they were responsible for 60% of the fee growth. The firm has poured lots of resources into their active funds and their active fixed-income has been a huge winner. The firm seems more willing now than ever to place itself as a big active manager where they have always been synonymous with passive investing. BlackRock credits its growth to its own internal push in active management but there has been a huge industry-wide surge in active funds.

FINSUM: Active equity still lags behind for lots of reasons, so its probably best to stick to direct indexing or ETFs in equity markets.

Joe Curtin, head of portfolio management at Merrill Lynch’s Chief Investment Office said there is increased interest from financial advisors in adopting model portfolios. Merrill is an industry leader in MP development, and they have seen AUM pull through almost triple since 2015 in this area. Part of what’s driving the interest is thematic investing within model portfolios. Risk and return are priority concerns with thematic blankets like ESG, demographics, and big data that align with investors' interests. Merrill is planning on launching more portfolios in the future with thematic focuses. Currently, they manage 147 portfolios with around $200 billion in wealth.

FINSUM: MPs are seeing wide adoptions because of their ability to easily tackle themes that 21st-century investors want in their portfolios.

More so than inflation, interest rate risk is the biggest factor in bond markets. If the Fed hikes and Yields rise then that will only lower the value of many bond ETFs. In response, many investors have turned to shorter-duration fixed income. However, the latest surge is off the charts. Lots of money is flowing into ultra-short cash like ETFs with the lowest duration treasuries. Investors are offloading even medium-duration treasuries in the five-three year window. PIMCO’s MINT saw almost $900 million in inflows setting a record week for the fund. Investors are just looking to store capital in the midst of all the interest rate risk in the economy right now.

FINSUM: It's unclear if one rate hike or two will send yields surging high enough, now might be the time to hold medium duration debt as a lot of the risk could be priced in.

Income investors must feel like they are swimming against the current. Over the span of 10 years, bond yields are lower than they once were* and those reliant on investment income have potentially struggled to generate adequate cash flow. Consider the yield on seasoned Aaa corporate bonds—a proxy for high-quality corporate bonds as rated by Moody’s. As of October 2021, the yield on such a portfolio was hovering over 2.6%, which is about half of what investors would have received 10 years prior**. Doing the math on any bond portfolio is both straightforward and rather alarming, and the resulting loss of income has not been insignificant.

What are the choices for investors facing this upstream struggle to generate adequate income? Some investors may choose to take on greater credit risk, moving money into lower-quality bonds in the hope of capturing incremental yields. Others have shifted assets into equity strategies that offer attractive dividend income, even though the volatility carried by equities has historically been higher than bonds. Both of these moves can be prudent in the right circumstances (if done judiciously), but investors need to be mindful of the added risks.
Given the current backdrop now facing investors—very low Treasury yields; equities at lofty valuations by historical measures; and an economy fueled by unprecedented amounts of fiscal and monetary accommodation that may ultimately usher in a new era of inflation—investors might benefit from a strategic approach to supplement their income by seeking dividends while also managing equity risk. Is this too good to be true? Perhaps not.

A three-step approach

Despite the fact that equities typically carry a higher risk profile than most fixed income asset classes, dividends can be a viable source of income when properly managed for volatility risk. One way to do this is to use equity index futures to try to neutralize equity. And even though derivatives can make some investors nervous, it’s important to remember that many fixed income portfolio managers commonly employ various types of derivatives to control duration, credit risk, and other exposures.
So how, exactly, could one potentially improve an income portfolio’s efficiency by seeking dividends while working to reduce risk? Here are three steps:

1. The first step is to build a portfolio of potentially high-dividend paying stocks. However, this should be done in a way that doesn’t just chase high-yielding stocks, but rather allocates across various sectors, regions, and market caps for balance.

2. The second step is to seek to neutralize the risk that typically comes with investing in these dividend-paying stocks. This can be done through various derivatives, which are contracts based on the value of underlying securities and often used to hedge risk. But the manner in which one hedges risk matters. A put option* is one type of derivative used to hedge equity risk. However, various external events can affect the availability and pricing of put options. We believe a better alternative may be to use very liquid broad market equity index futures that correspond to the asset classes of the high-dividend equity portfolio.

3. The third step is to balance any potential sector, style or region biases. Portfolios of high-dividend-paying stocks typically have a value tilt, so adding complementary growth exposure could help balance the portfolio.

Admittedly, building and executing this type of sophisticated income strategy can be challenging — likely beyond the capabilities of the typical individual investor. However, there are alternative income vehicles available that may be able to capture attractive equity dividends and offset the equity risk in a prudent manner. But remember, how this hedge is implemented matters, and evaluating these strategies is critical.
We believe, under the proper circumstances, it just might make sense for investors to carve out a place in a diversified income-oriented portfolio for market-neutral income strategies. This could be a strategic tool to supplement income in many market environments.

*Glossary of Terms:

• Derivatives: A financial contract whose value is dependent on an underlying security. Derivatives are commonly used to hedge risk, or in some cases to speculate on the future prices of securities. Options contracts, futures contracts and swaps are all examples of derivatives.
• Futures: Futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price. The buyer must purchase or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date. Underlying assets include physical commodities or other financial instruments. Futures contracts detail the quantity of the underlying asset and are standardized to facilitate trading on a futures exchange. Futures can be used for hedging or trade speculation.
• Put options: A type of derivative in which the buyer assumes (or will profit when) the future value of the underlying security will decrease. Investors often buy put options on individual stocks they already own to provide downside protection in the event that the underlying security falls.

*   As represented by the Bloomberg US Aggregate Index (9/30/2010 – 9/30/2020); Source: Bloomberg
** Source: Bloomberg

The opinions expressed are those of the author and are subject to change without notice. This material does not constitute a distribution, offer, invitation, recommendation, or solicitation to sell or buy any securities; it does not constitute investment advice and should not be relied upon as such. Investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision. There is no guarantee that any investment will achieve its objectives, generate positive returns, or avoid losses. Victory Capital Management Inc. is an SEC-registered investment adviser headquartered at 15935 La Cantera Parkway, San Antonio, TX 78015.