Time For A Change? Shifting Away From This Popular ETF Strategy Benefit Investors

As the investment landscape continues to evolve, Wall Street jitters are increasing over the number of interest rate hikes ahead. However, despite the uncertainty, one expert sees signs of a comeback in managed fixed-income exchange-traded funds (ETFs) and away from passive ETF products. Todd Rosenbluth, head of research at VettaFi, believes that with the Federal Reserve slowing down, investors are leaning on active managers to help them adjust to the ever-changing marketplace.

Speaking to CNBC's "ETF Edge" this week, Rosenbluth stated, "It's not clear how fast the Fed is going to slow down and how quickly that's going to adjust the marketplace. So, [investors] want to lean on the active managers to be able to do that." The need for active management is becoming more crucial in light of the current economic climate.

Rosenbluth believes that top ETF providers such as BlackRock's iShares and Vanguard, as well as newer players like Morgan Stanley and Capital Group, are saturating the market with a wide array of fixed-income ETFs. "We just now have more products," he said. "You've got two of the leading fixed-income ETF providers offering up some of the largest products. And, they're able to balance their portfolio shifting by taking on more duration or taking on more credit or less based on the environment that they're seeing."

According to Rosenbluth, this versatility is attracting investors by offering more opportunities to take advantage of active ETFs for leverage. By offering a wider range of products, these ETF providers can provide investors with greater flexibility and help them make the most of their portfolios.

While passive ETF products have their place, the need for active management is becoming more apparent in the current economic climate. By working with an active ETF provider, investors can take advantage of the current market opportunities and adjust their portfolios accordingly. In conclusion, the investment landscape continues to evolve, and investors must stay ahead of the curve to achieve their financial goals.

‘Stock-like Experience Through ETFs’

According to Jerome Schneider, the managing director and leader of short-term portfolio management and funding at Pimco, the benefits of active exchange-traded funds (ETFs) can help investors overcome their anxieties in the current investment climate. In particular, active ETFs offer several advantages that can ease investors' concerns over not only additional rate hikes, but also corporate earnings and liquidity conditions.

Schneider notes that these factors create uncertainty for both advisors and investors alike. However, he believes that active ETFs can help mitigate these uncertainties by providing greater flexibility in adjusting to market conditions. "You're getting the benefits of that liquidity," he said. "Even though you're buying bonds, you're getting a stock-like experience through ETFs."

Pimco, whose Active Bond Exchange-Traded Fund is off 2% so far this month, is advising clients on safe opportunities in this rising rate backdrop. According to Schneider, the yield component of fixed income right now is something that we haven't seen for decades. This provides investors with a unique opportunity to take advantage of active ETFs and adjust their portfolios accordingly. 

In the face of increasing market uncertainty, investors need to consider their options carefully to ensure they achieve their investment goals. With the benefits of liquidity, flexibility, and a stock-like experience through ETFs, active ETFs could be an ideal option for investors looking to stay ahead of the curve. As Schneider advises, it's important to seek out safe opportunities in this rising rate backdrop to take advantage of the current market conditions.

Why Bond ETFs Are Bouncing Back This Year?

The bond market is experiencing a rebound in the new year after a difficult 2022 for fixed income funds, partly due to an inverted yield curve. In January alone, fixed income exchange-traded funds saw inflows of around $26 billion, and in total, around $200 billion flowed into these funds last year. According to Todd Rosenbluth, head of research at VettaFi, there is now income available within fixed income ETFs, including higher-quality investment-grade corporate bond ETFs, high-yield fixed income ETFs, and some safer products. 

On Wednesday, the 10-year Treasury yield was trading at 3.759%, while the 2-year Treasury yield rose to 4.644%. The 6-month Treasury yield reached 5.022%, its highest level since July 2007. Given the current high yields and soaring valuations in the equity market, investors looking for quality are searching for pockets of strength while waiting to see whether a soft landing is possible this year. James McNerny, portfolio manager at J.P. Morgan Asset Management, emphasised the need to consider macro factors and examine what is driving bond yields and credit spreads at the moment.

The bond market is making a comeback in 2023 after a difficult year in 2022. An inverted yield curve has contributed to this rebound, and there has been a significant influx of money into bond exchange-traded funds (ETFs). In 2022, around $200 billion flowed into bond ETFs, and in January of 2023 alone, these funds saw $26 billion in inflows. The availability of income within fixed income ETFs is attracting investors, and higher-quality investment-grade corporate bond ETFs, high-yield fixed income ETFs, and safer products have all seen inflows this year.

As bond yields are at their highest levels in decades and valuations in the equity market continue to soar, quality-seeking investors are looking for pockets of strength to invest in. However, James McNerny, portfolio manager at J.P. Morgan Asset Management, believes that credit spreads on the front end of the yield curve are too tight to compensate for the potential of a harder landing. McNerny suggests that investors are opting for higher-quality, longer-duration products and credit products on the front end of the curve.

Jerome Schneider, managing director at Pimco, believes that fixed income funds are becoming more popular because they offer attractive yields in an uncertain economic environment. Active management with fixed income is also gaining popularity, with active funds making up more than 20% of ETF flows since the start of the year. Schneider, however, warns that it is too early to declare a victory regarding a soft landing, as there are still issues evolving with the inflation outlook.

Fixed income funds, specifically bond exchange-traded funds (ETFs), are gaining traction in the new year, as quality-seeking investors are searching for pockets of strength amidst soaring valuations in the equity market. With an inverted yield curve, investors are flowing into higher-quality, longer-duration products, and credit products on the front end of the curve. Many are opting for actively managed fixed income funds, which made up over 20% of flows since the start of the year, and the largest actively managed ETF in the industry, JPMorgan Ultra-Short Income ETF, has grown to $24.2 billion in the past 5½ years. 

According to experts, the Federal Open Market Committee's policy to tighten financial conditions is working as inflation steadily declined. However, inflation data released Tuesday revealed consumer prices rose 0.5% in January and 6.4% over the past 12 months, which was higher than some economists' predictions. As such, investors need to pivot and position portfolios to maintain optionality, seeking higher liquidity while balancing the Fed's tactics for fighting long-term inflation. More importantly, investors should pay attention to the evolving process with regard to earnings and corporate earnings specifically, which will remove some clouds as we get further into the year.

Tracking Error And Its Implication On Your ETF Investments

ETFs, or Exchange Traded Funds, are investment products that provide exposure to a specific underlying asset or basket of assets, such as stocks, bonds, commodities, or currencies. These funds are designed to track the performance of an index or benchmark, with the aim of providing investors with the same return as the underlying asset.

One of the main advantages of ETFs is their flexibility and liquidity. They are traded on an exchange like a single stock and can be bought or sold throughout the trading day at real-time market prices, which are usually very close to the fund's net asset value (NAV). This allows investors to easily and quickly adjust their exposure to the market, as well as take advantage of short-term trading opportunities. 

Unlike listed close-ended funds, which can trade at significant premiums or discounts to their NAV, ETFs are structured in a way that allows for the creation of new units and the redemption of outstanding units directly with the fund. This mechanism ensures that the price of the ETF stays close to its actual NAV. The value of the fund's underlying holdings at the end of the day determines the total net asset value of the fund. While the NAV and the price of the benchmark index are usually very similar, there may be slight variations due to factors such as fees, expenses, and tracking errors.

It is important to note that the performance of an ETF may not always be the same as that of the underlying index, due to factors such as tracking errors, fees, and market volatility. Therefore, investors should carefully consider the objectives, risks, and costs of an ETF before investing in it.

ETFs, or Exchange Traded Funds, are a popular investment option due to their low cost, diversification, and ease of trading. However, investors should be aware of the concept of tracking error, which refers to the difference between the performance of the ETF and the performance of its underlying index or benchmark. 

Tracking error can occur due to a variety of reasons, including management fees, transaction costs, and differences in the timing of rebalancing. While some tracking error is expected and can be minimal, large tracking errors can significantly impact an investor's returns.

Investors should also be aware that tracking error can be both positive and negative, meaning an ETF may outperform or underperform its benchmark. Additionally, tracking error can vary over time and may be more pronounced during periods of market volatility or when an ETF invests in less liquid securities.

To minimise the impact of tracking error, investors should carefully consider the ETF's management fees, the liquidity of the underlying assets, and the tracking error history of the fund. By understanding the concept of tracking error and its potential impact on returns, investors can make more informed decisions when selecting and managing their ETF investments.

Tracking Comes In Play Here!

Exchange Traded Funds (ETFs) are a popular investment option for many, but it's important to understand tracking errors and how they can impact your returns. A tracking error in the world of ETFs refers to the difference between the actual returns of the fund and the returns of the benchmark index it tracks. ETFs are designed to mirror the performance of stocks in a particular index, so the values of the fund and the index are usually very similar. However, in some cases, there may be a minor difference between the NAV of the ETF and the price of the benchmark index. This difference is referred to as the tracking error. Understanding tracking errors and their implications on your investments is important for any beginner looking to invest in ETFs. Reasons to do the same are as follows: 

ETFs or Exchange Traded Funds are a popular investment option among investors due to their low cost and easy tradability. These funds are designed to mirror the performance of a benchmark index, such as the S&P 500 or the NASDAQ, by holding the same stocks in the same proportion as the index. However, even with the best intentions and practices, ETFs may still experience tracking errors, which can impact the investor's returns. 

A tracking error is a difference between the actual returns of an ETF and the returns of the benchmark index it is designed to replicate. This discrepancy can be caused by a variety of factors, including the following:

Expenditure incurred by the ETF scheme: ETFs have a low expense ratio, which is the annual fee charged by the fund to cover its operating expenses. This amount is deducted from the fund's returns before they are credited to the investor, which may result in a slight difference between the ETF's net asset value (NAV) and the benchmark index.

Market conditions: The market can be volatile, and sudden changes in stock prices can affect the performance of the ETF. For example, if a particular stock in the ETF's underlying index experiences a significant price movement, it may cause the ETF's returns to deviate from the benchmark index. 

Liquidity issues: ETFs trade on an exchange like a stock, and the price of an ETF is determined by the supply and demand of its shares. If there is not enough liquidity in the market, the price of the ETF may deviate from the NAV, resulting in a tracking error. 

Rebalancing: ETFs are required to rebalance their holdings periodically to maintain the same proportion of stocks as the underlying index. During this process, the ETF may sell stocks that have increased in price and buy stocks that have decreased in price, which can result in a tracking error. 

Taxes: ETFs are subject to capital gains taxes, which are incurred when the fund sells stocks at a profit. The tax liability can reduce the fund's returns, resulting in a tracking error. 

The implications of tracking errors on an investor's returns can be significant. For example, if the ETF underperforms the benchmark index, the investor may lose money, even though the underlying index has performed well. On the other hand, if the ETF outperforms the benchmark index, the investor may earn higher returns than expected.

To minimise the impact of tracking errors, investors should consider investing in ETFs with a low expense ratio, high liquidity, and a well-diversified portfolio of stocks. Additionally, investors should monitor their ETF holdings and regularly compare their performance with the benchmark index to ensure that any tracking errors are identified and addressed. Overall, understanding tracking errors is crucial for any investor interested in ETFs to make informed investment decisions.