2023 saw many twists and turns in financial markets. Yet, one enduring trend was the growth of active and fixed income ETFs as measured by inflows and new ETF launches. Andres Rincon, the Head of ETF Sales and Strategy at TD Securities, shares why this was the case and what’s next for 2024.

A major factor is that mutual funds had net outflows, while ETFs had nearly an equivalent amount of inflows. This is an indication of a secular shift as investors and institutions increasingly favor ETFs due to more liquidity and transparency. In response, many asset managers are now converting fixed income mutual funds into active ETFs or offer dual versions.

Fixed income ETFs also benefited from yields being at their highest level in decades in addition to an uncertain economic outlook. Despite the rally in fixed income in the last couple of months of 2023, Rincon notes that investors had been positioning themselves for a downturn in the economy and pivot in Fed policy starting early in the year. 

Flows into active fixed income ETFs have also been strong, given that fixed income is more complex than equities. This is despite these ETFs typically having higher fees. Yet, active managers are able to take advantage of inefficiencies that are unavailable to passive funds. And, active is a particularly good fit for the current moment when there is indecision about the timing and extent of the Fed’s next move.

Finsum: TD’s Andres Rincon discusses what drove the surge of inflows into fixed income and active ETFs last year. And, why these trends should continue in 2024. 

According to Echelon Insights, 2024 will be another strong year for M&A activity with larger RIAs picking up smaller firms. This follows a strong year for the industry in 2023 despite headwinds such as higher borrowing costs which impacted buyers’ ability to impact financing. Yet, the robustness of M&A in less than ideal conditions reveals strong fundamentals.

In 2023, there were more than 320 deals for RIAs. It was the second-highest year on record other than 2022 which saw 342 deals. Over the last 5 years, the number of deals in the space have grown at a 12.1% annual compounded rate. Average assets per transaction was up 4%, while private equity was the most aggressive acquirer. In total, the sector was involved in 71% of deals and added cumulative assets of $466 billion.

Last year, the largest transactions in terms of asset size were Captrust and Cetera Financial Group. Cetera acquired Avanax for $1.2 billion to bolster its succession planning offerings and tax and wealth management capabilities. Captrust acquired Trutina Financial for $1.1 billion and had a total of 8 deals, adding $14 billion in assets. 

Finsum: Research firm Echelon Insights is forecasting another strong year for RIA M&A activity in 2024. 2023 had the second-most number of deals, despite several macro headwinds. 

PIMCO sees a changed environment in 2024 as the Fed will pivot to rate cuts. However, it sees the impact of prior rate hikes still impacting economies and leading to stagnation or a mild contraction. 

Financial markets will be focusing on the timing and pace of rate cuts. Based on history, central banks don’t ease in anticipation of economic weakness. Instead, they tend to cut only after recessionary conditions materialize and tend to cut more than expected by the market. 

PIMCO agrees with Chair Powell that inflation and growth risks are now more ‘symmetrical’. However, it believes the market is underpricing recession risk especially given that some assets are already priced for a soft landing given the strong rally in many assets over the past few months. 

It also believes that fixed income is particularly appropriate for this environment given that yields are still close to multi-decade highs. It also offers protection and upside in the event of economic conditions deteriorating. Within the asset class, it favors mortgage-backed securities and believes investors should stick to medium-duration bonds as yields are attractive while interest rate risk is reduced. On a longer-term basis, PIMCO sees neutral policy rates to reach similar levels to before the pandemic which is also supportive of the category. 

Finsum: PIMCO sees financial conditions easing in 2024 as the Fed cuts rates, but economic conditions will deteriorate given the delayed impact of tight monetary policy.

One persistent challenge for financial advisors is communications around annuities. According to a new research report from the Center for Retirement Research at Boston College, many advisors forgo recommending annuities to clients due to these concerns even when there is a risk that a client may outlive their funds. Additionally, advisors also report that clients often don’t take their advice when it comes to buying annuities which is one possible explanation for advisors’ reluctance.

The research report explores the question of why Americans don’t buy annuities despite the ubiquitous fear of running out of money during retirement and the desire to shield investments from volatility. 

Currently, only about 10% of older Americans have purchased an annuity. The research identifies a major issue as advisors are unlikely to recommend annuities and even when these recommendations are made, clients are unlikely to act on it.  

The research suggests that the issue is less about understanding the complexities of the product. In fact, most households with assets over $100,000 were either not familiar or only ‘somewhat familiar’ with annuities. Thus, there needs to be more awareness about annuities and the process of buying one needs to be simplified. Advisors should seek to clarify the steps involved and explain the decisions that need to be made.

Finsum: Americans have very low ownership rates of annuities. This is despite the common fear of running out of money during retirement and concerns that market volatility could impact investments. 

Two of the largest domestic natural gas producers and leaders in shale production, Chesapeake Energy and Southwestern Energy, have agreed to merge in a $7.4 billion deal. This continues a wave of M&A activity in the energy sector. For 2024, this is expected to continue given that many companies are flush with cash, while valuations are also attractive.

The merger is an all-stock transaction and is expected to close in the second quarter. According to Chesapeake CEO Nick Dell’Osso, the merger will enable them to compete on an international scale and lead to lower costs. The new, combined company will have a new name and a market cap of around $24 billion. It forecasts 15 years of inventory and expects a 20% increase in dividends due to “significant synergies” and an increase in free cash flow generation over the next 5 years. 

Last year, there were a handful of deals in the sector as ExxonMobil bought Pioneer Natural Resources for $60 billion, while Chevron bought Hess for $53 billion. Both companies were looking to boost production capacity. In 2024, analysts are forecasting that major energy producers will be looking to acquire high-quality shale holdings in public and private markets.

Finsum: Chesapeake Energy and Southwestern Energy agreed to a $7.4 billion merger. Analysts are expecting more M&A activity in the sector in the coming year.

There’s a major drawback to today’s hyper-connected world where investors are constantly receiving financial advice that is mostly short-term and doesn’t necessarily have the investors’ best interests in mind. Contrast that approach to a long-term, fundamental based approach that is based on timeless principles rather than impulsive thinking.

Recently, there has been a narrative that individuals should be buying individual bonds. Adam Abbas, a portfolio manager at Oakmark Funds, pushed back against this notion and made the case for why most investors are better off with mutual funds and ETFs. 

He acknowledges that bonds look very appealing given where rates are relative to historic levels and that default rates for high-quality securities are likely to remain low. However, the risk climbs when investors start ‘reaching for yield’ which tends to happen with individual investors. Therefore, some sort of comprehensive credit analysis is required from a bottom-up perspective. 

Further, most individual investors will not be able to sufficiently diversify their portfolios. This means that their portfolios would be damaged by a corporate bond default. In addition to understanding companies, investors also need to have a grasp on the macro picture as factors like inflation or rate policy can also impact returns. 

Given these difficulties, most investors are better off choosing an astute active manager to invest in bonds as they will conduct proper due diligence and ensure that portfolios are sufficiently diversified. 

Finsum: There’s a trend of individual investors buying individual bonds. Oakmark’s Adam Abbas pushes back against this and makes the case for why most investors are better off with a mutual fund or ETF. 

According to a survey conducted of attendees at the VettaFi Income Strategy Symposium, 60% are looking to add fixed income ETF exposure from cash and/or equities. This aligns with the view of fund managers on the panel who also believe that the Federal Reserve is near the end of its hiking cycle. 

John Croke, Vanguard’s head of active fixed income product strategy, commented that this is a good time to invest in fixed income. He sees the economy heading for a mild recession in the middle of the year despite the better than expected, recent Q3 GDP figures. He agreed with attendees that the hiking cycle is in its final innings and believes that the Fed funds rate will be closer to 4% rather than 5%. 

For investors looking to up their fixed income exposure, he recommends an ETF such as the Vanguard Total Bond Market ETF (BND). BND offers exposure to a diversified basket of investment-grade, US debt. He also recommends the Vanguard Ultra-Short Bond ETF (VUSB) for investors looking to exchange cash for bonds. VUSB is composed of a diversified basket of high-quality and medium-quality bonds with an average maturity between 0 and 2 years. 

Finsum: According to a survey of attendees at the VettaFi Strategic Income Symposium, 60% of advisors are looking to increase their fixed income ETF allocation in 2024. 

Allworth Financial manages $19 billion in client assets. Recently, Allworth CIO Andy Stout shared the firm’s approach to managing model portfolios for clients. The firm has a scorecard in which it quantitatively evaluates all investable mutual funds and ETFs. It follows up by having conversations with managers of funds with high marks to see if their process is ‘repeatable’ prior to investing.

Allworth’s core portfolio is a 60/40 mix between equities and bonds, respectively. The equities side is composed of 48% US stocks and 12% international. The fixed income side is a combination of short-term fixed income funds, investment grade, total return funds, and a handful of active funds.

Allworth believes in spreading allocations between multiple asset managers. For instance in its core portfolio, they use SPDR, Vanguard, Blackrock, and JPMorgan. When it comes to fund selection, the firm looks for securities that are equipped to navigate the entire business cycle. Stout also noted that consistency is valued more since success is more about ‘avoiding strikeouts’ than hitting a home run. In terms of risks, he sees recession risk as remaining elevated and thus favors more defensive sectors and investments.   

Finsum: Allworth Financial CIO Andy Stout shared the firm’s approach to model portfolios, and what opportunities and risks he sees at the moment. 

The SEC has approved the first set of bitcoin ETFs this week following a long review process. Multiple ETFs began trading on Thursday to prevent any firm from having a first-mover advantage. So far, the iShares Bitcoin Trust is the leader in terms of inflows followed by the Bitwise bitcoin ETF and the Fidelity Advantage Bitcoin ETF.

This may adversely affect demand for gold as investors will have another option to diversify portfolios. According to Joy Yang, the Global Head of Index Product Management at MarketVector Indexes, these new ETFs will likely result in gold remaining range bound around current prices due to less interest from investors. She believes it could be similar to 2021 when gold underperformed during the bull market in cryptocurrencies.

Still, she doesn’t see gold falling below $2,000 in 2024 and is bullish on it in the longer-term due to geopolitical risks and economic and financial uncertainty. And she acknowledges that gold has more upside if the Fed is forced to cut more aggressively than currently anticipated. 

Overall, gold and bitcoin have many similarities despite one being less than 2 decades old, while the other has been around since the dawn of humanity. And both are ‘stores of value’ relative to currencies and offer protection against inflation. 

Finsum: Approval of multiple bitcoin ETFs is expected in the coming weeks. This is likely to have a negative impact on gold demand as investors will have another option to diversify their portfolios.

2023 was an unprecedented year for interest rate volatility. The yield on the 10-year reached a low of 3.3% in April following the regional banking crisis, peaked at 5% in October, and finished the year at 3.8% following a series of supportive inflation data.

Given that inflation has declined to 3.1% which is nearly 70% less than the highest levels of 2021, the odds of a soft landing continue to rise. Currently, the Fed’s plan is to loosen financial conditions by lowering the Fed funds rate, while it continues to shrink its balance sheet.

Part of the plan should also be to reduce bond market volatility especially since it has doubled over the past 2 years and remains elevated relative to norms. In some respects, elevated bond market volatility is a consequence of the Fed’s battle against inflation. Now, it must also effectively deal with this issue before it becomes more substantial. 

Therefore, it’s likely that the Fed will cut back on its quantitative tightening program in which $95 billion worth of maturing bonds are not reinvested. Already, these efforts have succeeded in shrinking the Fed’s balance sheet by 15%. Another reason that curbing bond market volatility is necessary is that the Treasury will be auctioning off large amounts of notes and bills in the coming months. 

Finsum: The Federal Reserve has made significant strides in turning inflation lower. Now, it must take steps to reduce bond market volatility.