Bonds: Total Market
Passive ETFs have lower expense ratios because they don't require a team of portfolio managers to constantly analyze and adjust the mix of underlying investments. Over time, this lower cost can add a meaningful amount to the value of an investor's holdings.
While advisors and investors appreciate lower expense ratios, ETF's benefits extend beyond a simple fee advantage. A closer look reveals another hidden strength: real-time trading.
Unlike traditional mutual funds, which price investments only at day's end, ETFs operate like stocks, providing continuous price transparency and allowing for immediate execution. Gone are the days of uncertainty surrounding redemption values; with ETFs, you see the precise price you'll pay and receive, empowering informed decisions throughout the trading day.
Yet another impactful advantage lies in their liquidity. Popular ETFs often boast trading volumes exceeding even blue-chip stocks. This translates to tight bid-ask spreads, minimizing the price difference between buying and selling, and enabling efficient trade execution.
The combination of low-cost, real-time pricing, and ample liquidity make ETFs powerful tools for financial advisors seeking precision and flexibility within their client's portfolios.
Finsum: Low cost is not the only reason financial advisors should consider ETFs in their client’s portfolios. Consider these other advantages as well.
Stocks whose prices trail their implied intrinsic value are often seen as attractive investments primarily due to their undervaluation. But a recent article by Vanguard suggests another reason value stocks may be worth considering now. Historically, value stocks have outperformed their “growth” counterparts in times of economic recovery.
The report quotes Kevin DiCiurcio, CFA, head of the Vanguard Capital Markets Model® research team, as he makes the case. “So, if you believe that the Federal Reserve may have engineered a soft landing—that we’re going to sidestep a recession and that the economy’s next move is an acceleration—the case for value is strengthened.”
According to their research published in August, 2023, Vanguard estimated that value stocks were priced more than 51% below their fair value prediction. They stated, “It’s well-known... that asset prices can stray meaningfully from perceived fair values for extended periods. However, as we explained in (previous research), deviations from fair value and future relative returns share an inverse and statistically significant relationship over five- and 10-year periods.”
This observation adds one more reason value stocks are worth a look. In addition to favorable valuations and historically consistent dividends, the possibility that value stocks may shine during the coming economic recovery many anticipate, is another factor to consider. Whether held directly, within a passive allocation, or as part of a Separately Managed Account, now is a perfect time to revisit the case for value stocks in your client’s portfolios.
Finsum: Vanguard's research highlights value stock historical outperformance during economic recoveries.
Risk adverse?
Well, perhaps you’ve pulled up to the right window. After all, a big upside of active fixed income management: risk mitigation, according to npifund-com.
Possible problems – before they damage client portfolios – can be traded out of by alert active fixed income managers. What’s more, the site states: “We believe the next problem to address with active management is the leverage bubble in corporate debt. The disproportionately large BBB market, in particular, “poses a risk to the markets in the event of a wave of downgrades under the right recessionary scenario.”
Meantime, it seems investment strategy and fixed income teams at Vanguard have been burning a little midnight oil.
According to corpaemdisp.essp.c1.vanguard.com, new research from the company’s teams taken a close look into how the growth of a diverse coupon stack in the municipal bond market, followed by, down the line, “aggressive Fed rate hikes put negative convexity front and center in active muni investing.”
Those active managers steering through this environment of souped up rates are gaining leverage. Why? Because they’ve been able to wrap their heads around how to manage negative convexity risk – and they’ve been prudent while they’re at it.
More...
Share and share alike?
Well, tell that to exchange traded funds. While they burgeoned in popularity, when it comes to sharing equally – or consistently – in the billions of dollars investors pluck down on them monthly, they don’t exactly participate, according to thinkadvisor.com.
An ETF focused on environmental, social and governance investing was one that trailed the pack. Year to date, it experienced the largest withdrawals. “(That suggests) that there may be some backlash against ESG from investors,” said Sumit Roy, senior ETF analyst at ETF.com.
In any event, as an investor, want a cost effective way to diversify your portfolios across various asset classes: you’ll get that from top ETFs, according to Investopedia.com. The work of ETFs, it seems, is never done. Not only does it track a particular index, sector or commodity and trade on a stock exchange, the way in which it goes about it mirrors that of a regular stock, putting investors in a position to wield greater flexibility.
Stress in the bank sector? Sure, okay.
Uncertainty spawned by the U.S debt ceiling? Yep, no one can legitimately propose an argument to the contrary.
Political uncertainly festering in Russia? Well, yeah, if you’ve watched even a scintilla of news lately.
Despite that exhaustive list, the global economy’s hanging tough, strutting its resilience, according to gsam.com, which believes a restored allocation to core fixed income can help boost the ability to reinforce the resilience off portfolios to periods of bearish sentiments. That’s especially in light of a bounce in yields which have bolstered the protective power and income benefits of high quality bonds.
Meantime, the economy continues to perform better than expected, seemingly shucking aside rates hikes that have been a mainstay since last March, according to privatewealth-insights-bmo.com.
Consumers, buoyed by high employment, not to mention escalating wages, have hung tough.
For this cycle, with Canadian rates riding high and the stream of rate hikes -- for the most part, at least -a thing of the past, the time to take another look at fixed income allocations is right.
It seems there’s not much, um, fixed, about fixed income. That’s because, pre tell, in the second half of the year, conditions there likely will be choppy, according to dayhagan.com.
Ongoing tightening by central banks in the developed markets is pushing up short term yields, while long term yields are feeling the weight of slower growth and a pull back in inflation seemingly on the horizon later this year.
Meantime, the fixed income allocation strategy experienced scant changes in sector allocations coming into the month.
Now, want to talk about a calorie burner? Presenting active, active and more of it.
As in, as if you had to ask, active management.
"Everywhere we turn, we are hearing that a new dawn is upon us, and it is once again the time for active management. Many would be surprised that I totally agree, said Jason Xavier, head of EMEA ETF Capital Markets at Franklin Templeton, according to global.beyondbullsandbears.com.
It could be argued – as outlined in his predictions for the year – that the decade of “cheap” money and unprecedented low interest rates are a thing of the past and that those with the chops to work the volatile markets will reap the benefits.
That said, the picture on the horizon boasts considerably more potential; in other words, the dawn of active fixed income in the exchange traded fund or ETF vehicle. Clinging to the assumption that ETFs are a passive vehicle – and passive vehicles only – is a myth, he continued.