As we take a look at what is behind the headlines, investors in fixed income exchange traded funds should consider a new approach to bonds.
In the recent webcast, A Pioneering Deep Dive: What’s Next for Fixed IncomeJanel Jackson, Director of Vanguard and Head of U.S. ETF Capital Markets, described what is happening in the current market today, with record cash flow for equity ETFs in 2021, as investors continue to turn and inject money into value. International ETFs also continued their momentum from early 2021.
At the same time, bond ETFs cash flows were well diversified and positive for 80% of products. On the entry side, the middle core / core plus and inflation categories remained popular areas of interest among bond investors, while the ultra-short duration and long government categories saw slight exits.
Given the current pace of ETF cash flow, Jackson predicted that total ETF cash flow to date could exceed $ 900 billion this year. ETF cash flows also indicate that more and more investors and financial advisers are increasingly turning to passive fixed income strategies.
Looking ahead, Arvind Narayanan, Co-Head of Investment Grade Credit and Senior Portfolio Manager at Vanguard, advocated for maintaining core fixed income portfolio exposures in order to continue to leverage the environment. current fixed income securities.
âWe do not agree with those who suggest abandoning fixed income securities, especially in exchange for more exotic and generally more expensive alternatives. The way forward may be difficult, but we believe an allocation to fixed income will always diversify against equity risk in clients’ portfolios, âsaid Narayanan.
âWe will be watching for higher and more persistent realized inflation, a key risk factor. After a short-term peak this spring, we expect inflation to remain contained in the long term, anchored by population demographics, income inequality, globalization and technology, âadded Narayanan. âMarket prices have advanced expectations for future rate hikes, well ahead of the Federal Reserve’s forecast. We expect the Fed to remain committed to an accommodative policy for some time. “
Addressing inflation, one of the highest perceived risks to come, Narayanan highlighted Vanguard’s Treasury Inflation-Protected Securities strategies to help investors limit inflation in their wealth. Specifically, ETF investors can look to something like the Vanguard Short-Term Inflation-Protected Securities Index Fund ETF Shares (VTIP). VTIP seeks to track the performance of the 0-5 year Bloomberg US Treasury Inflation-Protected Securities (TIPS) index. The Index is a market capitalization weighted index that includes all inflation-protected government bonds issued by the US Treasury with remaining maturities of less than five years.
Narayanan also argued that investors can consider an active approach with a well-disciplined management team that is more in tune with market conditions to make ongoing adjustments and respond to risks that may arise. Vanguard’s active fixed income investment process includes a senior investment committee and an investment strategy group to inform top-down views on the economy, policy and long-term return prospects. Sector teams assess fundamental, technical and bottom-up valuation opportunities. Additionally, a credit and interest rate strategy team leverages top-down and bottom-up data to form a core strategy.
For example, the Vanguard Ultra-Short Bond ETF (VUSB), which launched in April and has already amassed $ 1.7 billion in assets under management, offers the features of an ETF structure for investors looking for an option for the anticipated cash flow needs of six to 18 months, according to Vanguard. The fund is designed to provide investors with low cost exposure to high quality money market instruments and short term bonds, including investment grade asset backed, government and corporate securities. The ultra-short strategy bridges the gap between money market funds offering a stable share price and short-term bond funds, which are intended for longer investment horizons.
VUSB is a strategy similar to that of the much larger actively managed Vanguard Ultra-Short-Term Bond Fund (VUSFX), which debuted in 2015. The fund and the new ETF invest in diversified portfolios consisting of a to a lesser extent, medium-quality fixed income securities, including investment grade credit and government bonds. However, the ETF also offers investors and advisers the ability to trade at intraday market prices. VUSB also comes with an inexpensive 0.1% expense ratio.
Financial advisors who want to learn more about the fixed income market can watch the webcast here on demand.