For investors, Tax Day often brings financial woes as they grapple with income from their portfolios. Over two decades, U.S. equity mutual funds have consistently yielded 7% of Net Asset Value in capital gains, irrespective of market performance. 


Direct Indexing emerges as a viable option, empowering investors to offset losses against gains within their portfolios or other income streams. Traditional portfolio management typically disregards tax implications, leading to hefty tax bills for investors, notably during market downturns like 2008.


Direct indexing offers a remedy, enabling investors to tailor their portfolios and strategically sell underperforming assets to counterbalance gains elsewhere. This method reduces turnover since the aim is to mirror an index with minimal trading. Even in bullish markets, avenues for loss mitigation exist, rendering direct indexing an attractive tax management strategy. By mirroring selected indexes, investors can curtail capital gains and potentially offset other income with net tax losses. 

Finsum: Alpha and tax efficiency should be thought of in a similar lens and shouldn’t be discounted by advisors. 

Active fixed income demand is surging. The secular drivers are increased comfort and adoption by advisors and investors with the category, in addition to the conversion of actively managed fixed income mutual funds into ETFs. From a cyclical perspective, the current environment, which has attractive yields but considerable uncertainty about the Fed and economy, also favors active fixed income strategies.

Despite its growth, active fixed income makes up less than 4% of allocations, revealing that there is more upside. As long as the Fed remains in a wait-and-see mode, active fixed income is likely to remain in favor. And this period of uncertainty has certainly been extended following the recent string of robust inflation and labor data. 

This type of rate environment requires a more flexible and agile approach, which is better suited for active fixed income. According to Bryon Lake, JPMorgan Asset Management Global Head of ETF Solutions, “To me, it’s all about active fixed income. With what is happening in the rate space, investors are all rethinking their fixed income allocations as we speak. We want to talk about active fixed income … where investors can dial in the exposures that they’re looking to get in the ETF wrapper.”

Finsum: Current uncertainty about the timing and number of Fed rate cuts in 2024 has been a major contributor to the growth of active fixed income. And this uncertainty has increased following recent economic data. 

Stocks and bonds have been weaker since Wednesday’s stronger than expected inflation report. While some on Wall Street are now questioning whether the Fed will be able to cut rates at all, Rick Rieder, Blackrock’s head of fixed income, continues to see rate cuts later in the year.

He notes that Thursday’s PPI report was softer than expected and an indication that most inflation is contained in the services sector. He doesn’t believe that monetary policy could have too much impact on this type of inflation and that it would have damaging effects on other parts of the economy. Overall, he sees recent data consistent with core PCE at 2.6-2.7%.

He believes the current data justifies between one and two rate cuts before year-end. However, he believes that the data could still evolve in a way that justifies more. With rates above 5% and core PCE below 3%, monetary policy is very restrictive, so he believes the Fed will lower rates regardless.

In terms of fixed income, Rieder is bullish on short-duration notes, as investors can get yields between 6% and 7%. He sees the 10-year Treasury yield modestly declining into year-end due to softer economic data and the Fed cutting rates. However, longer-term, he believes that it is range-bound between 4% and 5%.

Finsum: Many on Wall Street are starting to turn more pessimistic about the Fed’s ability to cut rates given recent inflation data. Blackrock’s Rick Rieder still sees cuts later in the year, even if the data doesn’t significantly improve.

In 2001, Vanguard pioneered a novel method for integrating ETFs as a share class within existing mutual funds, propelling the company to prominence in the ETF market. However, this competitive edge dissipated when the patent lapsed in May 2023, prompting a frenzied quest within the fund industry to secure regulatory approval for Vanguard’s ETF share class innovation. 


Noteworthy industry players, including Fidelity, Dimensional Fund Advisors, and Morgan Stanley, have vigorously advocated their positions to the Securities and Exchange Commission (SEC), joined by a myriad of smaller asset managers, propelled by factors such as immediate scalability, established track records, and structurally superior offerings.


Despite prior reservations expressed by the SEC regarding ETFs constructed as a share class of multi-class funds, the industry's push for ETF rule revisions has gathered steam, prompting the active involvement of leading stock exchanges. Analysts anticipate substantial market shifts with any SEC endorsement allowing fund companies to adopt Vanguard's ETF structure.

Finsum: The landscape of for ETFs is changing quickly and the race to the bottom, but regulation will be critical.

According to the study, nearly two-thirds of financial advisors state that they are primarily influenced by factors within their own practice when constructing portfolios. Conversely, these advisors are less likely to take input from their broker dealer (B/D) or custodian. The divergences between advisor channels pose challenges for asset managers in establishing their products and services effectively. 


Cerulli suggests that asset managers concentrate their distribution efforts on channels where advisors rely more on internal portfolio construction methods. Furthermore, the research highlights that advisors within the independent registered investment advisor (RIA) channel tend to construct portfolios internally, followed closely by hybrid RIAs. 


Asset managers who allocate distribution resources towards channels such as independent and hybrid RIAs, where advisors tend to make their own investment selections, may have an advantage in portfolio construction.  

Finsum: Independent RIAs help meet their clients’ needs with better portfolios.

A financial advisor survey by Capital Group reveals a surprising lack of understanding about active fixed-income ETFs. Despite growing demand, less than 4% of assets are allocated to them, with limited advisor confidence in using them. 


Surveyors highlight the benefits of active fixed-income ETFs, including consistent returns, portfolio diversification, and potentially lower fees. This knowledge gap, especially among wirehouse advisors, may be due to their recent introduction. 


Younger advisors seem more receptive, suggesting wider adoption as awareness grows. Capital Group believes active fixed-income ETFs will bridge the gap with passive options, urging advisors to prepare for client interest.

Finsum: Macro climates like the current one almost always give bond pickers and edge, and advisors are missing alpha. 

Treasury yields jumped higher following the hotter than expected March CPI report. The 10-year Treasury yield moved above 4.5%. It has now retraced more than 50% of its decline from its previous high in late October above 5%, which took it to a low of 3.8% in late December, when dovish hopes of aggressive rate cuts by the Fed peaked.

Clearly, recent labor market and inflation data have not been consistent with this narrative. In March, prices rose by 3.5% annually and 0.4% monthly, above expectations of a 3.4% annual increase and 0.3% monthly gain. Core CPI also came in above expectations. 

Instead of trending lower, inflation is accelerating. Now, some believe that the Fed may not be able to cut rates given the stickiness of inflation. Additionally, economic data remains robust, which also means the Fed can be patient before it actually starts lowering the policy rate. 

Some of the major contributors to the inflation report were shelter and energy costs. Both were up 0.4% and 2.2% on a monthly basis and 5.7% and 2.7% on an annual basis. Shelter, in particular, is interesting because its expected deceleration was central to the thesis that falling inflation falling would compel the Fed to cut.

Finsum: The March CPI came in stronger than expected, leading to an increase in Treasury yields. As a result, we are seeing increasing chatter that the Fed may not cut at all. 

Following the better than expected March jobs report showing a gain of 303,000 jobs, Treasury yields moved higher across the curve. The 10-year yield initially rose 14 basis points to a new 2024 high of 4.43% before backing off a bit. Overall, the jobs report reduces the urgency of the Federal Reserve to cut rates given the labor market’s resilience.

Going into the report, consensus expectations were for an increase of 200,000 jobs, which would be a softening from the 270,000 jobs added in February. It adds to the data showing inflation moving sideways rather than lower over the past couple of months. 

Yields also rose on Thursday following comments from Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, questioning the likelihood of rate cuts if inflation continues to linger above 2%. As a result, the odds of the Fed not cutting rates at the May and June meetings have increased. 

Some other positives from the report were the unemployment rate declining to 3.8%, despite an increase in the labor force participation rate to 62.7%. Average hourly wages increased by 0.3% on a monthly basis and by 4.1% annually. Both figures were in line with expectations. Job gains were strong across the board, with the biggest contributors being healthcare, government, leisure and hospitality, and construction. 

Finsum: Treasury yields moved higher following a stronger than expected March jobs report. Overall, the report led to a decrease in the odds of a rate cut at upcoming Fed meetings.

Investors with over $250,000 are increasingly turning to separately managed accounts, allowing them to handpick municipal bonds with professional guidance. These accounts now hold $987 billion in assets, surpassing mutual funds, which hold about $769.7 billion.


This shift has significantly boosted business, with Franklin Templeton seeing a 50% increase in assets under management over the past year and a half. Lowering the minimum investment to $250,000 has made these accounts more accessible, though still beyond the reach of most Americans. 


However, advancements in technology are driving further accessibility, with potential for minimums to drop to $100,000 in the near future. With artificial intelligence breaking down barriers by making management for portfolio quicker to digest the minimums are bound to fall. 

Finsum: The SMA explosion is here to stay in the fixed income market and managers should watch the evolution. 


Over the last year, there has been an increase in the accessibility and availability of direct indexing solutions. Still, the category continues to be dominated by high net worth or ultra high net worth investors. According to Anton Honikman, the CEO of MyVest, there is about $400 billion managed by direct indexing strategies. He anticipates that the next stage of growth for direct indexing will depend on younger and less affluent investors. 

Initially, the primary advantage of direct indexing was that it allowed investors to extract tax alpha. He forecasts that as direct indexing becomes democratized over the next few years, providers and advisors will have to make some adjustments.

He notes that custodians will have to offer fractional share support for the technology to work for smaller investors, as implemented by Schwab and Fidelity, which now offer direct indexing to investors with lower minimums. 

Typically, there is some premium involved with direct indexing over investing in low-cost ETFs. Given the increase in ETF options over the last couple of years, he believes that it marginally erodes the use case of direct indexing for many investors. Over the longer term, he sees the direct indexing premium compressing in order to remain viable vs. a portfolio of low-cost, targeted ETFs. Further, he believes that the next wave of direct indexing will be driven by younger investors who want to align their portfolios with their values rather than optimize their tax situation. 

Finsum: At one time, direct indexing was only available to high or ultra high net worth investors. As it becomes democratized, here are some considerations for providers and advisors. 

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