Direct and custom indexing are all the rage right now and many companies are racing to provide lower fees and smaller minimums. The most advantageous part of direct indexing is its goldilocks solution when it comes to fees, but particularly the active/passive debate mashup. The most talked-about advantage to custom indexing is tax-loss harvesting in the portfolio, but there could be a larger advantage: sectoral macro factors. The Fed is quickly planning on hiking rates which will adversely affect technology stocks, with a custom index you can add/drop targeted sectors that are facing financial headwinds due to policy changes.


FINSUM: This is a nice way to leverage the tailored portfolio that you can get from custom indexing.

New survey data is out regarding how investors are utilizing fixed income ETFs and how they are represented in a portfolio. In 2021 Fixed income represented about 18% of global ETF assets under management, and many investors plan on increasing their use going forward. The number one purpose for fixed income ETFs was for liquidity management as 83% of surveyors use them in this way. However, transition management, derivative complementarity, and tactical adjustments were also highly cited reasons for their use. Many draw on fixed income ETFs for liquidity purposes, and this is particularly evident in the bid-ask spreads. Relative to their underlying securities ETF spreads for HYG were 48x smiler than the underlying assets.


FINSUM: It's clear investors aren’t terribly worried about lower yields and rising interest rates, these ETFs are giving freedom and flexibility in investors’ portfolios.

Many investors and lots of market data suggested that interest rate hikes to the federal funds rate were coming at this last FOMC meeting. However, the Fed made a minor splash by withholding on hiking interest rates, but almost guaranteeing them in march. Higher borrowing costs will come in large part due to rising inflation and running a very tight labor market. Powell said this latest economic expansion varied drastically from the previous with significant growth and higher inflation. Powell also signaled that the Fed will soon begin to unwind the balance sheet as they raise rates. Treasury yields were already on the rise after the Feds statement and stocks ended in losses on the news too.


FINSUM: When the rate hikes come they most likely only happen on the Feds March, June, September, and December meetings because the Fed views its large ‘Summary of Economic Projections as critical to their forward guidance policy.

Inflation is picking up as PCE and CPI numbers are setting decade-long records, and the Fed is rapidly trying to regain control. The American people are beginning to show signs of angst as 65% of American’s say that Biden’s admin has not put enough attention on handling inflation and almost 60% say the same thing about the economy. This comes a swathe of low approval rating numbers come in where he has fallen almost 20 percentage points all the way down to the low 40’s. Overall about half of Americans say they feel frustrated and disappointed in the Biden admin. Biden’s focus has been on a series of regulatory and economic-centered packages, and many American’s don’t feel he is focusing on the issues they ‘don’t care about’.


FINSUM: Biden should stop pushing for another big fiscal package immediately if he has any hopes of reigning in inflation in 2022.

The bond market blues have been difficult as rising rates have started to really deflate a lot of funds. However, active bond funds have had an edge because not been pegged to indices they have freely navigated to localized emerging market debt. From HSBC to BNP many of the largest funds are buying up localized EM debt because many of these countries’ central banks tightened monetary policy last year and the rate hikes are already built-in. So as bond prices go down in the U.S. and inflation risk remains high, hawkish central banks in Russia, South Africa, Indonesia, China, and South Korea have all soured because localized currency means higher real payout and with relatively lofty interest rates the funds have a more promising horizon.


FINSUM: 12-Months ago the U.S. was looking at Emerging Markets as crazy for tightening the belt too quickly, but now these emerging markets are ahead of inflation and their bonds are soaring.

hroughout 2021 one of the biggest worries for investors, business owners, and policy makers has been the return of inflation. Long dormant, inflation has surged as markets and economies recover from the COVID-19 pandemic ... [Read More]

Investors have been wary of tech stocks as of late and instead are parking their money in investment-grade corporate bond funds. This week the sector garnered a whopping $2.9 billion in inflows which is the biggest week since July, over six months ago. Markets are expecting the Fed to hike this year, which means borrowing rates will start to hurt the growth-oriented stock, and the Nasdaq slumped to its worst start since 2008 as a result. However, the rising yields are also pushing more investors into relatively riskless corporate debt. Junk bonds didn’t get the same bump as many indices were down with a hawkish Fed.


Finsum: Don’t sell on tech stocks just yet, but it could be a bearish year for the number one market segment the last year if the Fed hikes four times!

Timing is everything in the market, and investors have a lot of reasons to be cautious in the bond market. A confluence of factors is making it likely that bond yields might jump up in 2022, particularly on longer-duration government debt. This is concerning as bond yields and prices move in the opposite directions so jumping on long-term debt right now could be deadly. For instance, the latest treasury yield rise sent an equivalent of an 800-point Dow Jones plunge in the iShares 20+ Year Treasury ETF (TLT). This is potentially scary as the markets are expecting three 25 basis points hikes from the Fed this year and inflation could also send bond yields rising. Most funds would see between a 1-3% hit on a 30-basis point yield spike.


Finsum: It’s critical to time the market but you might just stay away from long-term bonds, and stay on the shorter end of the duration.

ETFs saw a record performance in 2022 as inflows almost reached 1 trillion dollars, and while equity brought in over 60% of the inflows the second half was dominated by the fixed income market. This momentum in fixed income is expected to swell in 2022, particularly for the active ETF funds. Driving that those trending figures are the outperformance of active funds over passive funds, and an almost peak interest rate and inflation uncertainty. This sort of bourgeoning inflation and constricting Fed is unprecedented for the post-Volcker era. Active Issuers like T. Rowe price are very bullish on their prospects in the upcoming year.


FINSUM: While active funds haven’t brought home major returns they are getting better yield than passive funds and more diversity rather than piling on U.S. government securities.

The active ETF market is full of bonds as nearly 2/3rds of all active funds are in fixed income. Everyone is searching for a beta advantage in this market, and real estate could be the play. Index tracking fixed income isn’t cutting it because of the low yield environment, and treasuries taking up too much space. Investors are shortening the duration to mitigate the interest rate risks as inflation is baring down as well. Funds like DigitalBridge Fundamental US Real Estate, are managed fixed-income products that give exposure to fixed-income and REITs. Most investors hold bond funds for precaution but real estate does a better job of providing uncorrelated returns. DBRIX just hit a three-year anniversary in a growing market segment.


FINSUM: Shortening duration has been a no brainer for those with bond exposure but adding some real estate to the fixed income could really distinguish an active FI opportunity.

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