Fixed income ETF demand in 2023 has been dominated by Treasury ETFs, with a solid performance from alternatives like collateralized loan obligations (CLOs). CLO investment, offering attractive yields and strong risk profiles, is securitized, predominantly senior secured loans with good creditworthiness. The largest CLO-focused ETFs, such as Janus Henderson AAA CLO ETF and VanEck CLO ETF, have seen a significant increase in assets and growth rate.
PIMCO’s economic forecast for the next 6-12 months predicts slowing growth, slowing inflation, and a potential mild recession. Based on this, the firm emphasizes diversification, quality, and precaution, strongly favoring fixed income in their multi-asset portfolios. They maintain a neutral position on equities. The equity risk premium is at its lowest in over 20 years, suggesting bonds offer better opportunities than equities. Within equities, PIMCO prefers themes and sectors with growth potential, such as semiconductors and renewable energy.
DWS has introduced a set of four target-maturity fixed income ETFs in Europe, each with a management fee of 0.12%. These ETFs acquire bonds with specific maturity years (2027, 2029, 2031, and 2033), holding them to maturity. They help investors manage duration exposure and enable portfolio customization to meet specific cash requirements. The ETFs meet EU’s Sustainable Finance Disclosure Regulation, excluding companies involved in certain controversial sectors.
10-year Treasury yields have retreated from near 5% to around 4.52%, a positive sign for bond investors and suggesting analyst expectations of renewed interest in U.S. government debt. This trend could benefit aggregate bond ETFs, notably Vanguard’s BND which experienced a nearly 1% increase last month. Some believe persistent issues impacting bonds in 2023 may not recur next year due to factors like spending sequester and hiring returning to pre-pandemic levels.
In October, VettaFi’s Income Strategy Symposium covered topics like asset allocation considerations from Fed policy and others. It found that credit/duration exposure (51%) is most important for fixed income ETF selection, contrary to Schwab’s study, emphasizing total cost (58%). Rising or falling interest rates affect popularity, as seen with SPDR Bloomberg 1-3 Month T-Bill ETF and iShares 20+Year Treasury Bond ETF’s performance.
The general bond market faces another year of weakness, but high yield municipal bonds, specifically VanEck High Yield Muni ETF, present an attractive investment. Despite a 1.07% dip in the ICE AMT-Free US National Municipal Index, municipal bonds remain robust due to strong state-level tax collections. High yields coupled with low fees, particularly in fast-growing, low-tax states like Texas and Florida, make them lucrative for investors.
India will join the EM local currency benchmark in 2024, after JP Morgan announced the inclusion of specific local currency bonds from India to its GBI-EM suite of indices. The integration, the biggest reconstitution since China’s in 2020, will expand the index yield, extend duration, and shift regional exposure towards Asia. The move will draw an expected $20-$40 billion of near-term inflows, boosting India’s economy and providing the government with a new financing source.
ETF investors have embraced the rise in interest rates, directing $142 billion to fixed-income ETFs, constituting 41% of total inflows for U.S.-listed ETFs this year. Notably, treasury bond ETFs like the iShares 20+ Year Treasury Bond ETF and iShares 0-3 Month Treasury Bond ETF gained significantly. However, corporate bond ETFs see outflows due to perceived risk and the prospect of minimal extra returns compared to treasuries.
Tradeweb and FTSE Russell are partnering to enhance fixed-income index pricing and trading commodities. The collaboration aims to widen pricing across an extensive range of FTSE Russell administered securities. The arrangement also includes closing prices, which merge Tradeweb’s electronic platform activities to align with real trading levels. Over time, FTSE Russell intends to incorporate Tradeweb’s pricing into its fixed-income indexes.
Amidst market volatility and uncertainty, alternative income strategies have grown attractive. These include ultra-short exposures, options-based strategies, dividend enhancement, and closed-end funds. Investors validate the potential safety these alternatives could provide against interest rate hikes. Key market insiders include Garrett Paolella of NEOS and Christian Magoon of Amplify ETFs, who’ve favorably endorsed these strategies.
Mohit Gang: I will go with the Aditya Birla U.S. Treasury Fund first. It is a very, very unique idea. It is especially meant for
Amid geopolitical and policy uncertainties, advisors are preferring bond investments, as seen by Global ETFs’ 42% share of US market net inflows in early 2023. In an upcoming VettaFi Symposium, industry leaders will discuss varying aspects related to bond allocation strategies and active fund opportunities.
VettaFi is emphasizing fixed income this October with a series of webcasts and an Income Strategy Symposium. The company’s Explorer dataset indicates that interest is shifting towards U.S. corporate bonds, away from Treasury bonds. There has been strong demand for high-quality safe-haven ETFs, with increased flows to municipal bond and active ETFs. Despite substantial net outflows from high-yield ETFs, VettaFi sentiment data suggests investors are becoming more interested in corporate bonds for 2024.
Like other fixed income assets, fallen angel bonds have proven vulnerable to the recent spike in Treasury yields, but those elevated yields could signal an
