Fixed Income Market Developments
Equities have been the focus coming out of the recent heightened volatility; however, the fixed income ETF space has had some very interesting developments as well.
“You have stocks bouncing back, recovering to pre-tariff levels, but the bond market really hasn’t changed all that much,” Chang said. “Bonds are continuing to sell off. The yield curve continues to remain steep. So, what you see is that the flows have been decidedly jittery too.”
There is a lot of de-risking taking place currently, with investors seeking safety in short term-bonds. Roughly $19 billion poured into Treasury bill and short duration bond ETFs in April, Chang said, the second most on record.
On the other end, long duration bond ETFs saw more than $5 billion in net outflows in April. There was over $9 billion in high yield and investment-grade bond ETF outflows, she shared.
Following the Federal Reserve’s initial rate cut, both long-term Treasury yields and corporate bonds have experienced negative performance for a continuous 12-month period. This is an unusual occurrence, particularly for the long end of the Treasury yield curve, Chang pointed out.
Recent VettaFi polling data supports that advisors are continuing to stay short, and muni bond interest remains strong.
“I think there’s a very logical split in terms of the credit quality spectrum,” Chang said. “There’s still a lot of debate about the health of the economy, and obviously the Moody’s downgrade didn’t help things.”
That, combined with evidence of global investors exiting the U.S., really increases the risk for long Treasuries, she noted. “The fact that the economy may not be weakening as much may be a negative for inflation. So all the soft data is showing inflation expectations are still very much elevated. So that duration dilemma is very real right now," Chang explained.
Fixed Income ETF Issuers Worth Attention
There are several fixed income issuers and strategies that have warranted extra attention recently.
First is Fidelity, which is looking to position itself as a top three largest active ETF provider, Chang said. She pointed to the Fidelity Investment Grade Securitized ETF (FSEC ), which has added more than $2 billion through mid-May, bringing one-year flows to around $4 billion.
“It’s pretty remarkable,” she added, referring to FSEC’s rapid growth. “The fund primarily invests in investment-grade securitized debt securities, so it avoids the rate-sensitive long end in favor of short-term securitized debt.”
Next, the T.. Rowe Price QM U.S. Bond ETF (TAGG ) has seen assets triple “right out of the gate,” Chang said. The firm crossed $1 billion in assets this year.
TAGG is structured to offer a similar risk return profile to the Bloomberg US Aggregate Bond Index, but aims to cast a wider net across investment grade debt securities, she noted. “Right now, it carries less exposure to Treasuries; more to investment-grade corporates versus the AGG.”
Finally, the TCW Flexible Income ETF (FLXR ) just crossed $1 billion in assets. The ETF nearly tripled in size since it was converted from a mutual fund last June, Chang highlighted.
“[FLXR has] been one of the fastest-growing active bond ETFs in just under 12 months,” she shared. “[FLXR has taken] a dynamic approach over the past year, really pulling back on duration, staying as defensive as possible in terms of credit. They started the year with just 10% of assets in high-yield bonds and loans, but they’re upping that exposure through May, which I think has really helped boost their performance.”
Where Tidal Sees Opportunity as White-Label ETF Provider
Later, Tidal’s Venuto joined Geraci to discuss developments in the ETF space. Tidal is a white-label issuer, helping other firms launch, grow, and operate ETFs.
Venuto said the firm’s business development team currently sees large institutions that have not gotten into the ETF space as the greatest area of opportunity. “It’s a lot of mutual fund conversions, a lot of 351 conversions, a lot of, ‘hey, this strategy, as assets, [has] been working for us for many years, but the new buyers don’t even have access to mutual funds,’” he said.
“Then you still have the ETF entrepreneurs that are coming with active, complex products,” Venuto added. Notably, the era of simply offering a basic passive index fund is largely over. Today, virtually all clients seeking Tidal’s services approach the firm with requirements beyond a standard passive fund.
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