Wealth Management
Following a couple of quiet months in terms of financial advisor recruiting, there’s been another surge in activity in terms of M&A for RIAs as covered by Ali Hibbs for WealthManagement. It’s not a coincidence that this renewal in appetites is happening along with a resurgence in ‘animal spirits’ due to strong stock market gains and constructive developments on the economic and inflation front.
Commensurately, Cetera Holdings which is the parent company of Cetera Financial Group, acquired The Retirement Planning Group (TRPG). TRPG is a firm with 14 advisors and 40 employees with headquarters in Kansas City and offices in St. Louis and Denver. It marks the first pure RIA acquisition by Cetera, but it wasn’t exactly surprising given the recent arrival of former Fidelity senior executive Mike Durbin as CEO. As of the end of Q1, Cetera had $330 billion in assets under administration and $116 billion in assets under management.
According to Durbin, the deal is accretive for Cetera and ‘represents our commitment to constantly identify and deliver multiple options that give advisors a depth of choice and flexibility to affiliate their business with Cetera.’ Earlier this year, Cetera made minority investments in Prosperity Advisors and NetVEST Financial. It also acquired the retail wealth business of Securian Financial Group.
Finsum: M&A activity is picking up once again in the RIA space after a couple of months of less activity. The most high-profile is Cetera’s acquisition of The Retirement Planning Group.
In an article for Citywire, David Stevenson discusses whether active fixed income or equity ETFs will displace mutual funds. Already, passive equity funds have replaced mutual funds as the preferred vehicle for investors and institutions given lower costs, more transparency, and better returns over long time periods.
On the fixed income side, it’s a bit more challenging given that active funds have a track record of outperforming passive funds. In large part, this is because active funds have more latitude in terms of duration and credit quality that are not available to passive funds.
However, Stevenson is skeptical that active ETFs will be able to completely replace mutual funds. He sees many active ETFs as being mutual funds in an ‘ETF package’ with a slightly lower fee. He is also skeptical that active fixed income will continue to outperform over the long-term.
As evidence, he cites the lack of inflows into active ETFs despite a spate of launches over the past year. So far, active funds only account for 5.8% of assets under management, while passive makes up the rest. Of this, active fixed income ETFs have seen 9% of total bond flows, totaling only $8.5 billion, while passive fixed fixed income ETFs have seen $75 billion of inflows.
Finsum: Active fixed income funds have performed well YTD but still are not seeing significant inflows despite a number of new issues in the past year.
Todd Rosenbluth, the Head of Research for Vettafi, recently sat down with Joanna Gallegos, the co-founder of BondBloxx, about the state of the fixed income market and BondBloxx’s fixed income ETF offerings. BondBloxx is the only ETF issuer which specializes in fixed income.
Gallegos believes that the dynamic has shifted in a structural way for the asset class, following middling returns and yields over the past decade, amid a period of low rates and low inflation. Now, there is constant investor demand on the short-end of the curve given that yields are between 4% and 5% with minimal risk.
Demand is also quite strong on the long-end especially as many market participants are concerned that the economy is nearing a recession and inflationary pressures are abating as well.
However, Gallegos is not as concerned about a recession, believing that risks are already priced in. In fact, she recommends investors seek exposure to high-yield, corporate debt given elevated yields despite corporate balance sheets being in strong shape and sees upside in the event of an uptick in economic growth or easing of Fed policy.
Finsum: Joanna Gallegos is the co-founder of BondBloxx which is the only ETF issuer specializing in fixed income. She’s quite bullish on the asset class and sees the most upside in high-yield, corporate debt.
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In an article for ETFTrends’ Direct Indexing Channel, James Comtois discusses how direct indexing essentially means that advisors and investors become portfolio managers, since they own the stocks directly and can customize their holdings based on their goals, preferences, and individual circumstances.
Contrast this to passive ETFs which continue to be the dominant investment vehicle for investors and advisors in which stocks are indirectly owned with no possibility of customization. Some drawbacks to indirect ownership are no shareholder rights in terms of voting on Board members or other issues. Additionally, there is no possibility of harvesting tax losses during periods of volatility to offset capital gains in other holdings.
Many younger investors are passionate about their investments reflecting their values. This is simply not possible through passive ETFs. For instance an investor may not want to own companies in the defense industry, direct indexing allows them to exclude these companies and replace them with stocks that have similar factor scores to ensure integrity with the underlying index.
Given these benefits, it’s understandable why the category has seen major growth in the last couple of years. And, this growth will continue especially as direct indexing is no longer only available to high net worth investors. It’s increasingly being offered to those with smaller sums to invest through firms like Vanguard and Schwab.
Finsum: Direct indexing is rapidly growing due to the benefits it offers investors which include increased customization and tax loss harvesting.
In an article for MarketWatch, Isabel Wang details comments from Blackrock’s Gargi Chadhuri who is the Head of Investment Strategy for iShares. The major uncertainty for fixed income investors is whether the Fed’s current pause is temporary or the end of the hiking cycle.
According to Chaudhari, the market is too optimistic that the Fed is finished in terms of further hikes given that inflation has proven to be more resilient than expected. Therefore, Blackrock is recommending medium-term duration fixed income to take advantage of elevated yields with reduced volatility.
At the latest FOMC meeting, Chair Jerome Powell surprised market participants with a more hawkish tone than expected, implying that the job isn’t done yet in terms of tightening policy. Further hikes are bearish for the long-end, while the budding signs that the economy could stumble into a recession are bearish for the short-end.
As a result, the strategist recommends medium-duration fixed income such as the iShares 3-7 Year Treasury Bond ETF or the iShares Core US Aggregate Bond ETF. Overall, he sees more opportunity in fixed income given higher rates and an uncertain outlook especially following a decade of a lack of opportunity in the space during the period of zero percent rates.
Finsum: iShares head of Investment Strategy, Gargi Chadhuri believes that medium-duration fixed income offers the best combination of risk and reward for investors.
Pacific Investment Management Company (PIMCO) is launching two new active fixed income ETFs. The firm is already a leader in the active fixed income space, and it continues to offer new products to meet growing demand for the category. Compared to active equity funds, active fixed income has a better track record of outperformance vs passive. Active fixed income funds are also able to take opportunities in different parts of the capital structure that are unavailable to passive fixed income funds.
Its two new offerings are the PIMCO Multisector Bond Active ETF (PYLD) and the PIMCO Ultra Short Government Active ETF (BILZ). PYLD will invest in investment-grade and high-yield fixed income securities globally with a focus on long-term appreciation, diversification, and maximizing yield. PIMCO CIO Daniel Ivascyn sees major opportunities given the turbulence and volatility over the past couple of years.
Its second launch is the PIMCO Ultra Short Government Active ETF (BILZ) which will invest in short-term US Treasuries and mortgage-backed securities with the goals of maximizing yield and capital preservation. It’s designed to be an alternative to cash and a way for investors to take advantage of lofty short-term rates.
Finsum: PIMCO is launching 2 new active fixed income ETFs. One is a global, multistrategy fund looking at long-term opportunities following recent dislocations. The other invests in short-term government debt and is designed to serve as a cash alternative.