Higher for longer. This was the key message to me from advisors and ETF industry folks at the Exchange conference when talking about fixed income. Many of these discussions occurred Tuesday after the latest consumer price index figures came in higher than expected. Core CPI remained at 3.9%, instead of falling further.
In January, the Federal Reserve kept its policy rate in 5.25–5.50% range. Some investors were recently expecting the first rate cut could occur in at the beginning of May. However, the timing of the first one could be further delayed, which would be consistent with what many advisors told VettaFi last month.
What Do Advisors Think About Rate Cuts?
In mid-January, during a webcast with BondBloxx, VettaFi asked advisors, “How many rate cuts do you anticipate the Fed will make in 2024?” We listed the market’s current estimate and the Fed’s current estimate to provide some background information. However, most respondents (61%) forecast just one to two rate cuts. Meanwhile, just over a third (35%) believe three cuts are coming. The market’s then-current estimate was unpopular with this subset of advisors, as 1.4% of them thought six were coming.
“It’s not clear when the Fed will begin making a few maintenance cuts,” said James McNerny, portfolio manager of the JPMorgan Ultra-Short Income ETF (JPST ). “Some renormalization could help the front of the curve perform better.”
JPST is the largest actively managed U.S. fixed income ETF, with $22 billion in assets. The fund targets a duration of less than one year, but has taken on more interest rate risk in the past two years. The average duration was 0.6 years, up from 0.2 in 2022. The fund sports a 5.4% 30-day SEC yield and has an 0.18% net expense ratio.
“Investors expect higher for longer,” agreed Rob Harvey, co-head of product specialists at Dimensional Fund Advisors. “We think they are better off in the short end of the curve but it is nice to have flexibility."
The Dimensional Short-Duration Fixed Income ETF (DFSD ) manages $2.3 billion aided by $230 million of net inflows in 2024. The actively managed fund sports a 5.0% yield and has an average duration of 1.6 years. DFSD has a 0.25% expense ratio.
Highlighting Actively Managed Fixed Income ETFs
Despite the entrance of some well-established asset managers, financial professionals are allocating less than 4% of assets under management to active fixed income ETFs, a new Capital Group survey shows.
“Financial professionals say they have a limited awareness of the benefits associated with active fixed income ETFs,” explained Holly Framsted, Capital Group’s Head of Global Product Strategy and Development. “This includes the ability of the ETFs to seek consistent returns, sit at the core of a portfolio, and offer low fees.”
The Capital Group Short Duration Income ETF (CGSD ) is a $375 million fund that charges a 0.25% fee. The fund has a 4.9% yield and incurs an average duration of 2.1 years.
Given the uncertainty about Fed policy, we think more advisors will turn to active fixed income ETFs in 2024.
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