While income investors are certainly enjoying higher yields this year, the past decade had not been as kind. The low to flat interest rates over the past ten years may have helped propel the economy and markets since the financial crisis, but they also made it quite difficult for investors to find income. So, Wall Street firms got creative and created complex investment products that offered higher yields. But with rates rising this year, those same products are putting firms at risk, which is why they're jostling to hedge those positions by investing in derivatives that benefit from higher volatility in the market. However, those derivatives are making volatility in the US government bond market even worse. Treasuries were already experiencing massive swings as investors bought derivatives to lessen their bond risk, while dealers made long-volatility bets to hedge their own exposure. This combination led to a huge jump in the MOVE Index, which measures the implied volatility of Treasuries via options pricing. In October, the index breached 160, which is near the highest level since the financial crisis. With additional money betting on the ups and downs of bond yields, this is only going to add more fuel to the fire.
Finsum:As firms increase in their purchases of volatility-linked derivatives to hedge risk, the treasury market is expected to become even more volatile.
Investors were offloading ultra-short-term bond ETFs in a hurry ahead of the Fed’s most recent rate hike. The Federal Reserve’s announced its fourth-straight 75 basis-point interest-rate hike on Wednesday. Ultra-short-term bond ETFs, which are considered cash-like, saw some of the largest inflows this year as the Fed raised rates. However, it appears that investors have now had a change of heart. The iShares Short Treasury Bond ETF (SHV), which tracks U.S. Treasury bonds with maturities of one year or less, saw $2.5 billion in outflows on Tuesday in the fund’s largest one-day outflow on record, according to Bloomberg data. SHV wasn’t alone as a host of other ultra-short-duration funds also saw massive withdrawals earlier in the week. The record outflows suggest that traders believe rising Treasury yields may have topped out and they no longer need the safety that short-term bond ETFs provide. They are either open to more risk with longer duration bonds or are preparing for a potential recession.
Finsum:Ultra short-term bond ETFs are seeing massive outflows as traders extend into longer-duration bonds ahead of a potential recession.
Following its February launch of five equity ETFs and one fixed-income ETF, Capital Group recently launched three active fixed-income ETFs on the New York Stock Exchange. The three new funds include the Capital Group Short Duration Income ETF (CGSD), the Capital Group Municipal Income ETF (CGMU), and the Capital Group U.S. Multi-Sector Income ETF (CGMS). CGSD is a short-duration income fund that pursues high-quality income with low-interest rate sensitivity. CGMU is a core municipal fund that pursues tax-exempt income consistent with capital preservation while seeking total return, and CGMS is a diversified U.S. multi-sector income fund that pursues a high level of current income and the opportunity for capital appreciation. Mike Gitlin, head of fixed income for Capital Group said the following about the three funds, “We’ve deliberately built our three new active ETFs in categories that have historically been underserved by active ETF managers including multisector bond, municipal national intermediate bond and short-term bond. We believe these will help investors manage short-term cash needs, generate tax-exempt income, and benefit from some of the best starting yields we’ve seen in credit in years.”
Finsum:To meet underserved areas of the fixed-income market, Capital Group launched three actively-managed bond ETFs.
Stocks and bonds during the first half of the year?
Kerplunk. Scientifically speaking, of course.
That’s where balancing could come in handy, according to morningstar.com. Investors who abided by strategy dictated by discipline wouldn’t have taken as big a hit, according to morningstar.com.
Of course, rebalancing doesn’t come with any guarantees when it comes to generating an improvements on returns, results this year show why maintaining a tight rein on risk isn’t such a bad idea.
As an investor, whether you’ve been around the block a few times or are wet behind the ears, your priorities probably vary widely, according to smartasset.com.
Thinking about building a portfolio from scratch? Well, you might want to try this instead: you’ll be assigned a pre built model portfolio by many advisors.
Also consider that most investment advisors keep close tabs on and review their model portfolios to make sure they’re achieving their benchmarks and doing their thing at level that are proper. But that doesn’t happen at the snap of a snap of the fingers; instead the process entails rebalancing each portfolio, which your ability to maintain the asset allocation that was designated.
Fretting over salting away enough cash for retirement against the backdrop of the helter skelter ride, courtesy of the stock market?
Yeah, it’s a thing.
In the dawning days of September, the S&P 500 index of stocks saw almost 24% fly out the window, according to Sandy Wiggins, of ACG Wealth Management in Midlothian, appearing on wtvr.com. Bonds, what’s more, typically, regarded as a safer option than stocks, also hit the skids. Through that month, Bloomberg US Aggregate – the main bond index – kissed away 14.6%.
“It’s a scary time for investors, especially those who have retired or are planning to in the next few years,” Wiggins said, reported wtlocal.com. “However, the key to successful long-term investing is to keep fear from making decisions in such difficult times. Investor psychology is such that greed in good times and fear in bad lead to overreaction and bad decisions.
“First, realize that timing the market is a losing strategy,” Wiggins continued. “By timing the market, we mean moving from stocks to cash or something else conservative with the expectation of going back when things feel better. The best demonstration of the folly of market timing is to examine the impact on returns by staying invested and missing the best return days.”
Historical lows. This year, they’ve besieged the Bloomberg Global Aggerate and Bloomberg U.S. Treasury indexes, according to etftrends.com.
As they put high risk assets in the market, investors are second guessing the role of fixed income in their portfolios. That’s where active managed funds can provide a boost.
Fixed income might not exactly be in the driver’s seat now, but when it comes to the bond market, investors can’t simply look the other way. Why not? Well, it’s not just the world’s largest securities market – and by a considerable margin – it’s also rode the wave of significant growth. And that’s both in terms of size and the number of issuers.
“Navigating the bond market is even more challenging for advisors this year as bonds fall in value,” said Todd Rosenbluth, head of Research at VettaFi. “However, the ability to tap into the expertise of experienced managers along with the liquidity benefits of an ETF has been compelling.”
Meantime, face it: many investors aren’t accustomed to the volatility and price drops prompted by dramatically growing interest rates this year, according to advisorscapital.com.
The upside? Yields on fixed income securities have really made out better than they have in years.
American Century Investments recently launched its newest active ETF, the American Century Short Duration Strategic Income ETF (SDSI). The fund, which now trades on the NASDAQ, will seek to generate attractive yield by investing across multiple fixed-income market segments that maintain a short-duration focus. The fund invests in both investment-grade and high-yield, non-money market debt securities. This could include corporate bonds and notes, government securities, and securities backed by mortgages or other assets. SDSI is a transparent active ETF with an expense ratio of 0.32%. The fund management team includes Jason Greenblath, Charles Tan, Jeffrey Houston, CFA, and Peter Van Gelderen. Ed Rosenberg, American Century's head of ETFs, noted that "SDSI expands our existing Short Duration Strategic Income capabilities to an actively managed ETF. The Short Duration Strategic Income ETF seeks to complement an investor's core bond holdings with high current income, broad diversification, and the potential to mitigate the impact of rising rates."
Finsum: American Century continues to build up its active ETF lineup with the addition of the American Century Short Duration Strategic Income ETF.
With yields rising as the Fed pursues its hawkish monetary policy, investors are piling billions into ETFs that track both the short- and long-term treasury market. For example, $13 billion has been added to the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) this year, a product that now offers some of the most attractive yields in over a decade, while having very little interest-rate risk. On the other end of the yield curve, investors have flooded a similar amount into the iShares 20+ Year Treasury Bond ETF (TLT), which has experienced historic losses due to the Fed’s rate hikes. TLT has seen more new inflows than any other fixed-income ETF this year. However, the reasons for these inflows likely differ between the two. Investors seeking yield can now find that in a short-term treasury ETF like BIL, while investors that believe the Fed will slow down rate hikes, or even cut rates in the future, will benefit from the high duration that a long-term bond ETF such as TLT could provide. The steep losses in the market this year have also driven defensive investors into cash-like instruments such as BIL.
Finsum:Investors looking for yield and safety are piling into short treasury ETFs, while investors seeking high duration are flooding into long-term bond ETFs.
A, um, fixation, among investors this year: the performance of fixed income assets, according to Wells Fargo.
Wells Fargo published several reports on issues playing a role in the challenging environment today. The intent of the executive summary was to address heard often voiced by investors. Some of the top questions revolving around fixed income included:
- What is happening to bonds so far in 2022?
- Why continue to invest in bonds?
- Why is the Fed garnering so much attention this year?
- What should investors expect from the remaining three Fed meetings of this year?
- What does Fed quantitative tightening mean?
- What do you mean when you say, “financial conditions in the economy are tightening”?
- Should we be worried about liquidity in bond markets?
Equity and fixed income markets simultaneously endured negative returns in the first of the year – catching a number of investors off guard. While all major fixed indexes bounced back in July in light of receding yields, year to date, they remain negative.
Inflation? Yep; it’s stuck in gear; that is, elevated. Meantime, the broader economic environment – especially the labor market, has proved to be one tough cookie, according to gsam.com.
”Higher inflation and higher growth volatility are propelling us into a higher yield environment, marking a departure from the post-financial crisis era,” according to Whitney Watson, global head of Fixed Income Portfolio Management, Construction & Risk. “Ultimately, we think this presents opportunities in high-quality fixed income assets, such as investment grade corporate bonds and agency MBS.”
State Street Global Advisors is teaming up with Barclays’ research business to build and manage active products in systematic fixed income. While systematic equity strategies have been around for a while, the strategy is somewhat new to fixed income due to a lack of data. While most stock trades are easy to track, fixed-income trades are typically over-the-counter, with electronic platforms only handling a part of the business. This makes accessing and harvesting data in fixed-income markets more complex. However, that’s changing. Efficiency in the bond markets is increasing the viability of implementing systematic debt strategies. With fixed income, managers attempt to generate alpha through data analysis that uncovers asset mispricing, according to SSGA. This comes as the demand for systematic fixed income is increasing. According to a State Street survey of 700 investors, 91 percent of institutions are interested in using systematic fixed-income strategies over the next 12 months. The survey also showed that investors managing more than $10 billion were most interested in implementing these strategies using investment-grade and high-yield corporate securities.
Finsum: As demand for systematic fixed-income strategies heats up, State Street Global Advisors and Barclays are teaming up to build and manage active systematic fixed income strategies.
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According to an index that measures Treasury market volatility, bond volatility is at a level not seen since the peak of the COVID market crisis in March 2020. This is a worrisome sign that the Treasuries markets, which are considered a safe haven for investors, are not functioning as they should. For context, the biggest one-day move for the benchmark 10-year Treasury in 2021 was 0.16. This year, there have been seven days with larger moves. Liquidity is evaporating, which has caused the soaring volatility. A Bloomberg index is currently showing that liquidity in the Treasury markets is worse now than in the early days of the pandemic, while implied volatility, measured by the ICE BofA MOVE Index is near its highest since 2009. This is coming at a time when Bloomberg News reports that the largest buyers of Treasuries, including Japanese pensions, life insurers, foreign governments, and US commercial banks, are pulling back at the same time. Even Treasury Secretary Janet Yellen has expressed concern about a potential breakdown in trading, saying that her department is “worried about a loss of adequate liquidity” in the US government securities market.
Finsum: A lack of liquidity and a pullback in large-scale treasury purchases has triggered volatility not seen since March 2020.
When it comes to direct indexing, a little daylight seems to be peeking in.
As investors, young and old, flock to ETFs, you might say direct indexing’s keeping an eye out for its lane, according to blomberg.com.
Two hands on the wheel, of course.
Questions surface about whether investors have an inclination to dive into direct indexing in light of the burgeoning attraction to ETFs, notes new research from Schwab.
If you have an appetite for index funds and ETFs, but greater control over fund holdings and the possibility to outperform, direct indexing just might float your boat, according to schwab.com.
By paring down costs while stepping up access among investors to different segments of the market, index funds and ETFs have put an entirely new face on investing. That said, when it comes to direct investing, contrary to performance historically, make way for the fly in the ointment: when it comes to control over the fund’s individual holdings, control – perhaps of any sort – is nonexistent.
However, times, it seems, have changed. Limited, back in the day, to institutional and high-net-worth investors, today, direct indexing’s available to a wider range of investors. Why? Technological strides, which have coaxed down investment minimums.
Direct indexing, of course, is surging in popularity, according to barrons.com. While Fidelity, Schwab and Vanguard have initiated direct indexing products over the past year or so, direct indexing’s leveraged by only 12% of advisors. Not to pile on – but piling on – a survey showed, when it comes to direct indexing, half of advisors have too clue what it is.
Um, someone say Wikepedia?
It might be a bit brisk north of the border, but at least some fixed income ETFs seem to be hot in Canada, according to moneysense.ca.
In the aftermath of around 20 years of essentially solid returns, as interest rates nudge yields up and drive down prices, bond portfolios are absorbing some body blows. the iShares Core Canadian Universe Bond Index ETF (XBB) – which missed the panel’s picks of best fixed income ETFs for portfolios – still dispenses broad exposure to investment-grade Canadian bonds.
“I’m not committed to bonds at all,” says panellist Yves Rebetez. “People are now seeing the truth in the descriptive ‘return-free risk’ that some have been pointing to for a while. This ‘return-free risk’ is a tongue-in-cheek play on that. Who wants to invest in risk, void of potential returns?”
Opting for cost efficient funds like ETFs in Canada and elsewhere, the variety of them is, well, substantial, according to wealthawesome.com. As last year wound down, there were 1,177 Canadian listed ETFs in Canada.
Canadian ETFS are available in every shape and size. Among that wide range of options, it’s key to buckle down on the best funds.
Most portfolios commonly carry fixed income or bond ETFs – particularly if risk doesn’t float the boast of those investors who are most risk repellant.
Want to talk logic? For a second? A combination of income exchange-traded funds are most, well, logical for a substantial chunk of investors.
Many investors are now adding private credit investments to their portfolios according to a global survey of institutional investors conducted by State Street Global Advisors. The survey report, The Future of Fixed Income, asked institutional investors how they view the fixed income market and how they’re allocating their investments amid the current market volatility. The findings were based on answers from 700 pension funds, endowments, foundations, and sovereign wealth funds, as well as wealth and asset managers. The results also found that investors have become more open to systematic fixed income strategies to help them fight the impact of rising prices and inflation. In addition, 51% of survey respondents stated their interest in increasing allocations to bank loans and 42% want to increase their allocation to inflation-linked bonds over the next 12 months. The findings also showed that investors are embracing index-tracking investments to gain efficient access to attractive sectors due to fee pressure and increased transparency. Over one-third of the respondents said that more than 20% of their fixed income portfolio is allocated to index strategies. The figure rises to 57% for investors with AUM over $10 billion.
Finsum: A survey conducted by SSGA noted that institutional investors are shifting their fixed income allocations amid the current market environment.