Bonds: Total Market
Last month, fixed-income ETFs saw more inflows than equity ETFs. Elisabeth Kashner, director of global fund analytics at FactSet said in a phone interview with MarketWatch that “You don’t see that every day. That’s kind of a big deal.” According to Kashner, fixed-income ETFs brought in around $23.7 billion in January, while equity ETFs raked in a total of $22.9 billion. In 2022, rates rose quickly amid sky-high inflation. Due to this, investors embraced more “targeted products” than broad fixed-income funds, according to Kashner. This continued into January as the Schwab Short-Term U.S. Treasury ETF (SCHO) and the iShares 20+ Year Treasury Bond ETF (TLT0) were among the top 10 funds for inflows. Kashner noted that the Schwab Short-Term U.S. Treasury ETF “is what you buy defensively if you want to be in high-quality” fixed income “but you don’t want too much duration exposure,” due to concern about rising rates. She also said that the “iShares 20+ Year Treasury Bond ETF, which provides duration exposure, tends to attract investors worried about a recession.” Other fixed-income ETFs that saw strong inflows last month include the iShares JP Morgan USD Emerging Markets Bond ETF (EMB) and the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), according to FactSet data.
Finsum:Fixed-income ETF inflows outpaced equity ETF inflows last month as investors continued to embrace more targeted fixed-income products amid high inflation.
While many investors kept cash on the sidelines last year, that should change this year, according to Goldman Sachs. Ashish Shah, chief investment officer of public markets at Goldman Sachs says “A lot of investors last year were frozen because of the volatility and uncertainty. As that uncertainty narrows, it’s really important for investors to take action.” Shah believes the Fed is closer to the end of the rate-hike cycle than it is to the beginning and rising inflation has begun to slow. With that in mind, Goldman is suggesting that now is the time to add duration to a portfolio through fixed income. Shah says “Cash in the portfolio of investors is still incredibly high. What we’re advocating [is that investors should] come out of cash in the bank and go into the market and capture some of this yield.” He added that while bonds are generating income, they also can rally even further than they already have. However, selection matters more now than it used to. According to Shah, investment-grade credit and municipal bonds with longer durations could be effective in achieving portfolio goals. He also noted that lower-quality muni bonds also have room to generate attractive yields and they’re tax-exempt.
Finsum:Goldman Sachs CIO Ashish Shah believes that now is the time to put cash to work in investment grade credit and municipal bonds as the Fed is nearing the end of its tightening cycle and inflation is starting to slow.
No matter where you look, fixed-income analysts are proclaiming 2023 as the year of the bond. But why will that be the case? According to fund firm Nuveen, “The anticipated rate decline, along with the higher starting yield, creates an attractive outlook for bonds this year.” The firm believes that the high starting yields this year could be setting the stage for a bond market comeback. According to Nuveen’s latest fixed-income report, over the last four and half decades, years that feature higher yields early on often produce higher returns by the end of the year. For example, in 1982, when the starting yield was 14.6 percent, the bond market gained 32.6 percent over the next 12 months. After consecutive rate hikes in 2022, the bond yield in early 2023 is at the highest level since the global financial crisis. The firm also believes that a slowdown in rate hikes could generate higher returns. While the Fed raised rates aggressively last year to curb inflation, it has indicated plans to move more gradually this year with recession fears growing. Since bond prices move inversely with yields, the firm says a drop in yields could create “potential price return opportunities.”
Finsum:Fund firm Nuveen is bullish on bonds this year due to an anticipated rate decline and a high starting yield.
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Fidelity expanded its active fixed-income ETF lineup with the launch of the Fidelity Tactical Bond ETF (FTBD). FTBD, which now trades on the NYSE Arca, has an expense ratio of 0.55%. The fund is co-managed by Jeffrey Moore and Michael Plage and is measured against the Bloomberg U.S. Aggregate Bond Index. The fund's portfolio can be allocated across the full spectrum of the debt market, including investment-grade, high-yield, and emerging markets debt securities across different maturities. Managers will consider the credit quality of the issuer, security-specific features, current and potential future valuation, and trading opportunities to select investments. The launch brings Fidelity’s lineup to 12 active fixed-income ETFs with about $3.9 billion in assets under management. Jamie Pagliocco, Fidelity’s Head of Fixed Income told VettaFi that “Fidelity is committed to offering investors choice and providing a diverse lineup of investment solutions. Fidelity’s fixed income lineup combines our extensive investment capabilities and expertise as an active manager to provide investors with a range of solutions across the fixed income risk spectrum and vehicle type, and Fidelity Tactical Bond ETF provides investors with another competitive offering to further expand client vehicle choice.”
Finsum:Fidelity expands its lineup of actively managed fixed-income ETFs with the launch of the Fidelity Tactical Bond ETF which can invest across the full spectrum of the debt market.
Last week, over $10.2 billion went into U.S.-listed ETFs, with the majority going into fixed-income funds. Bond ETFs pulled in $4.5 billion according to ETF.com data. This followed the previous week’s $7.8 billion in inflows that went into bond funds. In the first week in January, fixed-income products pulled in $9.4 billion, a jump from $1.5 billion in the last week of December. Investors are flocking to fixed-income exchange-traded funds as recession warnings ring louder. Investors are jumping from stocks to bonds as they are often seen as a safer investment during economic downturns. Earlier in the month, Bloomberg News reported that Wall Street firms are sounding the alarm for a recession in 2023. BlackRock’s Investment Institute stated that “a recession is foretold,” while Barclays is predicting “one of the weakest years for the world economy in 40 years.” This also comes after multiple Fed officials have predicted interest rates remain elevated for the foreseeable future. Federal Reserve Bank of San Francisco President Mary Daly said in a streamed interview with the Wall Street Journal a couple of weeks ago that “I think something above 5[.0%] is absolutely, in my judgment, going to be likely.” Her comments come a week after Minneapolis Fed President Neel Kashkari stated that the “central bank’s so-called terminal rate could reach as high as 5.4% before easing,” in a post on Medium.
Finsum:As Wall Street firms sound the alarm on a potential recession, investors are flocking to fixed-income ETFs, which are seen as safer investments during economic downturns.
Last year, portfolios that were allocated to 60% stocks and 40% bonds were hammered, as both the stock and bond markets sustained heavy losses. The portfolio has generally yielded steady gains with lower volatility since the two asset classes typically move in opposite directions. However, the strategy backfired last year after the Fed’s tightening policy sent stocks tumbling from record highs and drove Treasuries to the worst losses since the early ‘70s. This made advisors and investors question the viability of the 60/40 model. But the bond market’s selloff last year pushed yields so high that analysts at BlackRock, AQR Capital Management, and DoubleLine expect fixed-income securities to breathe new life into 60/40 portfolios. This year, both stocks and bonds have gained, propelling the 60/40 portfolio to the best start to a year since 1987. Their view is supported by the expectations that the Fed is nearing the end of its tightening policy as inflation comes down. If this view turns out to be correct, it reduces the risk of bond prices falling again and allows them to once again serve as a hedge against a potential drop in equities stemming from a recession. In a note to clients, Doug Longo, head of fixed-income strategists at Dimensional Fund Advisors, wrote “Expected returns in fixed income are the highest we’ve seen in years.”
Finsum:Based on the view that the Fed is nearing the end of its tightening cycle, analysts expect fixed-income securities to once again serve as a hedge against stocks in the 60/40 portfolio.