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At The Money: How Fixed-Income Investors can use ETFs to their Best Advantage. · Masters in Business

0:01
Speaker 1: Ah money is Diamon, and make money is diamond and
0:06
Speaker 1: me money games donon and me money is Donon, and
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Speaker 1: make money is dimon and me money games common, and
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Speaker 1: me money is Domon and me money games common to.
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Speaker 2: Make Investors who are looking for yields were once required
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Speaker 2: to purchase individual bonds or mutual funds. Today ETFs have
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Speaker 2: changed the fixed income market just as surely as they've
0:35
Speaker 2: changed the equity markets. Investors can purchase low cost bonding
0:39
Speaker 2: tfs in just about any flavor you can imagine. I'm
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Speaker 2: Barry Ridults, and on today's edition of At the Money,
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Speaker 2: we're going to explain how fixed income investors can use
0:51
Speaker 2: ETFs to their best advantage. To help us unpack all
0:56
Speaker 2: of this and what it means for your portfolio, let's
0:59
Speaker 2: bring in Still Lately. He's managing director at Blackrock and
1:03
Speaker 2: Global head of I Shares Fixed Income ETFs. Previously he
1:08
Speaker 2: was the head of I Shares Fixed Income Strategy. He
1:11
Speaker 2: helps to oversee more than a trillion dollars in fixed
1:15
Speaker 2: income assets. So Steve, let's just start simply why ETFs?
1:21
Speaker 2: What are the advantages over bond, separately managed accounts or
1:26
Speaker 2: mutual funds?
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Speaker 3: Good to see you, Barry, Thanks for having me. So
1:30
Speaker 3: this has been a bit of a journey that spans
1:33
Speaker 3: decades actually, and so to really understand the power of
1:38
Speaker 3: bondi tfs, you have to kind of go back before
1:41
Speaker 3: they existed.
1:41
Speaker 4: So let's call that, you know, kind of late nineties.
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Speaker 3: The very first bondi tf came out in Canada into
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Speaker 3: the year two thousand and then in the US in
1:52
Speaker 3: two thousand and two. But if you go back to
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Speaker 3: the nineties, buying bonds was a non trivial exercise, and
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Speaker 3: the way it was done it was a very much
2:01
Speaker 3: voice driven market. Pick up the phone, you call several people,
2:05
Speaker 3: you get several quotes, hoping the market's not moving on you,
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Speaker 3: at the same time, not quite sure if you exactly
2:10
Speaker 3: got the best price. There was very little transparency et cetera,
2:15
Speaker 3: et cetera, and kind of uneven access.
2:18
Speaker 4: So depending on who.
2:19
Speaker 3: You were and what kind of wallet you had, you
2:22
Speaker 3: might get different treatment. And so that was a problem
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Speaker 3: for some investors, not for all. For investors who had access,
2:32
Speaker 3: you know, maybe they viewed that as an advantage, but
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Speaker 3: for a lot of us it was really challenging to
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Speaker 3: build a high quality, diversified bond portfolio.
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Speaker 4: So what do bond ETFs do?
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Speaker 3: They actually opened that whole world up to transparency. You
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Speaker 3: basically now had not even a single bond, but a
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Speaker 3: portfolio bonds that trade on exchange. You know what's in it.
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Speaker 3: You could see the price on exchange every second ticking
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Speaker 3: buy so you don't have to pick up the phone
3:01
Speaker 3: and call people. You just simply can trade on exchange
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Speaker 3: and you know you're getting the best price that's quoted
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Speaker 3: on exchange. Now, again, like anything, you have to use
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Speaker 3: proper discipline when executing orders, etc. But it was just
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Speaker 3: a shocking revolutionary thing to be able to trade bonds
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Speaker 3: on an exchange.
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Speaker 2: So that makes a lot of sense. I remember when
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Speaker 2: this market was very dealer driven, but there was always
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Speaker 2: an option, or at least over the past let's call
3:29
Speaker 2: it forty years, an option of bond mutual funds. There
3:33
Speaker 2: are obvious advantages for equity ETFs over equity mutual funds.
3:39
Speaker 2: How does that translate to fixed income ETFs? What are
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Speaker 2: their advantages over fixed income mutual funds?
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Speaker 4: Well, there are a couple.
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Speaker 3: You know, mutual funds still play a role. You'll tend
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Speaker 3: to see them in four oh one k's and things
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Speaker 3: like that. That's more of an architecture thing. But away
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Speaker 3: from that, mutual funds price one one time a day
4:02
Speaker 3: at the at the end of the day, right, so
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Speaker 3: you don't know in the middle of the day really
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Speaker 3: what the what the valuation is. And so I think
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Speaker 3: a lot of advisors and and investors have found the
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Speaker 3: idea of being able to trade intra day at a
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Speaker 3: known price really attractive because as you can imagine, you know, Barry,
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Speaker 3: let's just say you get you know, a strong inflation number,
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Speaker 3: or you know an employment reporter or what have you,
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Speaker 3: and you want to move on that. You can put
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Speaker 3: in an order for your mutual fund and sure that'll
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Speaker 3: get filled at the end of the day. You really
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Speaker 3: don't know what value BONDI TF you can just go
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Speaker 3: and exchange immediately and you can decide whether that's the
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Speaker 3: right price or not, and you can act on it.
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Speaker 4: So there's that.
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Speaker 3: The second part of it would just be the transparency
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Speaker 3: issue for mutual funds. You may you know, have you know,
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Speaker 3: quarterly reporting or what have you as opposed to daily
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Speaker 3: for most bondietfs, and that includes active strategies. So a
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Speaker 3: lot of investors are attracted that daily transparency as well.
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Speaker 2: And there used to be I don't know, tens of
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Speaker 2: thousands of mutual fund out on the fixed income side.
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Speaker 2: What sort of selection do ETFs present for bonds or
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Speaker 2: fixed income in the exchange traded fund wrapper.
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Speaker 3: Well, it's been exploding, particularly, I would say, since the
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Speaker 3: ETF rule in twenty nineteen, and then also you know
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Speaker 3: the pandemic and the subsequent policy responses I think unleashed
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Speaker 3: a whole new level of demand with the normalization and yields.
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Speaker 3: But standing here today, I think we're over a thousand
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Speaker 3: bond ETFs in the United States alone. I Shares has
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Speaker 3: over one hundred and sixty in the US. We have
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Speaker 3: one point three trillion assets in the US or sorry,
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Speaker 3: nine hundred over nine hundred billion in the US and
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Speaker 3: one point three trillion globally. But the selection is enormous
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Speaker 3: now and it spans not just asset class meaning treasuries, credit,
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Speaker 3: high yield, emerging markets, et cetera, but also within a
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Speaker 3: given asset class, you now have maturity cuts, you have
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Speaker 3: outcome overlays. On top of that, you have hedged products.
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Speaker 3: So it's been very very much built out, and you
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Speaker 3: also now have quite a lot of active strategies within
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Speaker 3: those asset classes or sectors.
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Speaker 2: One of the criticisms that the equity side of ETFs
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Speaker 2: always get is, well, just wait till the next crash
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Speaker 2: or period of stress. You'll see how poorly these perform.
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Speaker 2: That didn't happen during the pandemic crash. And then we
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Speaker 2: started hearing the same criticisms about fixed income ETFs. Just
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Speaker 2: wait till a moment of stress. How did ETFs perform
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Speaker 2: either in twenty twenty during COVID and how did fixed
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Speaker 2: income ETFs perform during the rate shot in twenty twenty two.
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Speaker 3: Yeah, and this is what I think really garnered the
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Speaker 3: next wave of adoption because over the years, if you
6:58
Speaker 3: go back to you know, sort of the global financial crisis,
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Speaker 3: they existed then, and we did have a lot of
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Speaker 3: investors who were interested in them just because of this
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Speaker 3: idea that Okay, during a crisis, I can see where
7:10
Speaker 3: things are trading on exchange, and Okay, that's valuable because
7:14
Speaker 3: now I can look at an investment grade credit ETF
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Speaker 3: like LQUD or a high OLDTF like HIG during the
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Speaker 3: crisis and see what's happening, which is very hard to
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Speaker 3: do if you remember back then, So the criticism was, well,
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Speaker 3: they're small, they haven't been around that long. Not really
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Speaker 3: sure if I want to use them yet, I need
7:33
Speaker 3: to see them get larger and go through.
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Speaker 4: More stress tests.
7:36
Speaker 3: Okay, So between the global financial crisis and twenty twenty,
7:41
Speaker 3: there were kind of minor bumps here and there, but
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Speaker 3: nothing severe. I think twenty twenty, especially February March, when
7:49
Speaker 3: even you know, some treasuries and investment grade were struggling
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Speaker 3: to trade. I think that finally got people over the line.
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Speaker 3: Because at the worst of it, it was hard to
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Speaker 3: trade offer and treasure, it was hard to trade investment grade.
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Speaker 3: But ETFs, even though they may have been trading at
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Speaker 3: a discount, were tradable, and they were trading in record volume,
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Speaker 3: and I think that finally finally got a lot of
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Speaker 3: people over the hump.
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Speaker 4: That was the test they were waiting.
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Speaker 2: For, and they definitely passed with line collars.
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Speaker 3: Yeah, and then the rape shock was just icing on
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Speaker 3: the cake, you know, another stress episode, which which further
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Speaker 3: I think cemented investor confidence in the wrapper.
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Speaker 2: So let's move beyond the structure of ETFs and start
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Speaker 2: talking about fixed income investing in ETFs. Money markets are
8:36
Speaker 2: three six, three seven, And as we're recording this, yields
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Speaker 2: went up a little bit today on non farm payroll data.
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Speaker 2: But you know, you're not that far off from four percent,
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Speaker 2: pretty competitive with the middle of the curve for bond yields.
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Speaker 2: Why should investors think about rolling out of money markets
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Speaker 2: and into bond ETFs in this rate and environment.
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Speaker 3: And this this is the question, and I think it
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Speaker 3: doesn't have to be a binary choice, right, So what
9:07
Speaker 3: we've been saying is that, you know, if you think
9:11
Speaker 3: about what sort of happened with views on the FED
9:14
Speaker 3: over the last you know, call it six months, it's
9:16
Speaker 3: changed a lot, right. We went from having some cuts
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Speaker 3: priced in now we've got you know, as we're standing
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Speaker 3: here today, now we have a full hike priced in
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Speaker 3: by the end of the year. We have another one
9:27
Speaker 3: priced in for next year, maybe more. And that could
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Speaker 3: change just as rapidly going the other way. And so
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Speaker 3: it's really less about you know, trying to time or
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Speaker 3: finesse this and more about just diversifying. So sure you're
9:40
Speaker 3: gonna be able to earn decent carry in your money
9:44
Speaker 3: market account right now, but as a diversifier, what we've
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Speaker 3: been saying is take at least some of that step
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Speaker 3: out on the curve. You know, let's call it intermediate,
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Speaker 3: you know, maybe three to seven years something like that,
9:57
Speaker 3: because in the event that things do, for example, the
10:01
Speaker 3: geopolitical picture could change very very rapidly. You could get
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Speaker 3: sort of oil prices receding, inflation kind of coming back down.
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Speaker 4: Et cetera.
10:09
Speaker 3: That will get us back off to the races the
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Speaker 3: other direction. And you know, it's really funny, Barry, if
10:14
Speaker 3: you look at the ten year yield over the last
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Speaker 3: three years, it kind of looks like a Siginn wave.
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Speaker 3: You've been you know, three sixty up to five and
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Speaker 3: everywhere in between, over and over and over again. And
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Speaker 3: so it's very very hard to time this right. So
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Speaker 3: just don't put all your eggs in one basket. Have
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Speaker 3: your bets, you know, sort of spread out on the curve,
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Speaker 3: because you never know how fast it will change.
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Speaker 2: Yeah, it's kind of fascinating talking about the reversals. How
10:39
Speaker 2: long were we waiting for the FED to start cutting
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Speaker 2: and it seemed like it took years and years of
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Speaker 2: people being wrong, and now we're reversing, not only reversing
10:51
Speaker 2: the idea of cuts, but given the war, given what's
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Speaker 2: going on inflation. It's amazing that it took such a
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Speaker 2: short period of time to price in two hikes. But
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Speaker 2: given where we are in the FED cycle, I don't
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Speaker 2: even want to say cutting cycle. What does this lack
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Speaker 2: of clarity mean for a fixed income investors? How should
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Speaker 2: they think about?
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Speaker 4: Are we cutting?
11:13
Speaker 2: Are we raising? Are we going into a recession? Are
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Speaker 2: we not going into recession? It seems like it's been
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Speaker 2: especially confusing period.
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Speaker 3: Yeah, And this is what's really fascinating to watch is
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Speaker 3: that investors very interestingly, just based on the flows. You know,
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Speaker 3: we're having record flows, you know, yet again this year,
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Speaker 3: and that's on top of records prior several years. We
11:37
Speaker 3: are seeing investors kind of look through this volatility and
11:41
Speaker 3: so far, you know, I want to say that we're
11:44
Speaker 3: up somewhere around twenty to thirty percent, I'm relative to
11:47
Speaker 3: last year. So investors don't seem to be too concerned
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Speaker 3: by the dramatically, you know, kind of changing landscape here.
11:55
Speaker 3: What they are focused on is the income opportunity. So
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Speaker 3: the majority have fixed income assets are now yielding above
12:02
Speaker 3: four percent.
12:03
Speaker 4: That was not the case.
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Speaker 3: I think it was something like twenty percent before before
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Speaker 3: the pandemic between the crisis and the pandemic, and so
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Speaker 3: investors are actually looking at this as an opportunity where
12:14
Speaker 3: they can now earn income infixed income for the first
12:17
Speaker 3: time in many years, and they're very focused on that
12:20
Speaker 3: as opposed to just you know, the tenure, whether it's
12:22
Speaker 3: at four or five percent. They're focused on the income
12:25
Speaker 3: and so that's how they're allocating.
12:27
Speaker 2: So we're talking a little bit about inflation. I would
12:30
Speaker 2: be remiss if I didn't bring up the I shares
12:33
Speaker 2: tips ETF. Our clients are owners of this. They've done
12:38
Speaker 2: really well over the past couple of years. Tell us
12:41
Speaker 2: a little bit about why people should think about having
12:45
Speaker 2: a tips bond ETF in their portfolio.
12:48
Speaker 3: Yeah, and it's it's proven to be really really powerful
12:52
Speaker 3: because it was not expected. Everybody had pronounced inflation dead.
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Speaker 3: We saw it come roaring back, and then there was
12:59
Speaker 3: the idea of very strong policy response to rein it
13:03
Speaker 3: back in. Now we've gotten a supply shock and energy,
13:06
Speaker 3: which is sort of you know, thrown things a little
13:09
Speaker 3: bit in doubt again, and so it goes, you know,
13:12
Speaker 3: to the point that you should have a resilient portfolio,
13:16
Speaker 3: and that resilience some of which has to be anchored
13:19
Speaker 3: in try to protect against inflation. And so it's up
13:22
Speaker 3: to the investor to decide how much or how little
13:25
Speaker 3: they want to lean into that. And so you can
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Speaker 3: buy individual tips bond ETFs like s t I P
13:30
Speaker 3: or t I P. We even have a shorter one
13:33
Speaker 3: which is one year, called ICPI if you really want
13:35
Speaker 3: to just peg inflation itself. But I think other exposures
13:39
Speaker 3: are now incorporating it. So you know, we just we
13:42
Speaker 3: just launched late last year a broader bond ETF. So
13:47
Speaker 3: you think of the AG the universal, we have something
13:49
Speaker 3: called the total which is BTOT that includes an inflation component.
13:54
Speaker 3: So the AG in the universal don't have that.
13:57
Speaker 4: This one does.
13:58
Speaker 3: And that is a nod to the idea that going
14:00
Speaker 3: forward you probably want to have some protection against inflation.
14:05
Speaker 3: It'll wax and wane, but I think you know it
14:08
Speaker 3: shows you now that it's necessary.
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Speaker 2: So tips are one sort of opportunity that's in the
14:14
Speaker 2: fixed income ETF area today. What other areas are attractive?
14:18
Speaker 2: Do you like? Investment grade corporates, high yield munis, even
14:22
Speaker 2: agency mortgages and active bond e tf's what what do
14:26
Speaker 2: you see the greatest opportunity set in in the world
14:30
Speaker 2: of ETFs and fixed income.
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Speaker 4: So let's do that in two steps.
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Speaker 3: I think overall, you know, I think you want to
14:37
Speaker 3: be in sort of that high quality tilt right for
14:42
Speaker 3: many investors, that is, that is a comfortable thing from
14:46
Speaker 3: a risk profile standpoint. So getting back to the two
14:49
Speaker 3: dimensions here, credit and duration.
14:51
Speaker 4: So credit we were.
14:52
Speaker 3: We've seen the flows go mostly into very high quality
14:56
Speaker 3: so I think treasury's investment grade, et cetera, but also
15:00
Speaker 3: kind of that intermediate duration component as opposed to being
15:03
Speaker 3: much longer in the curve. So investors are sort of
15:06
Speaker 3: anchoring on high quality intermediate duration. Away from that, what
15:12
Speaker 3: also has been getting a lot of interest, you know,
15:13
Speaker 3: going back to the income theme, investors really like what
15:17
Speaker 3: we're calling these plus sectors. And what that means is, Okay,
15:21
Speaker 3: outside of treasuries and investment grade, what do you have.
15:25
Speaker 4: Yeah, you have high yield.
15:26
Speaker 3: And emerging markets that may not suit all investors, but
15:28
Speaker 3: you also have things like securitized assets which offer you know,
15:32
Speaker 3: a pretty attractive income profile relative to relative to their
15:37
Speaker 3: duration risk, et cetera. And so you know, think of
15:40
Speaker 3: that as mortgages are one part of that, but then
15:43
Speaker 3: you can also have asset backed securities, commercial mortgage backed securities,
15:46
Speaker 3: things like that. So securitized assets have been really popular
15:50
Speaker 3: as well.
15:52
Speaker 4: On the active side, as you know.
15:55
Speaker 3: Rick Reader launched a multisector income ETF called b I
15:58
Speaker 3: n C Bank has exposure to a lot of those
16:01
Speaker 3: plus sectors, and that fund has proven to be enormously popular. Again,
16:06
Speaker 3: that income theme without taking outsized risk. And so it's
16:11
Speaker 3: that sort of general theme, let's lean into income, deemphasize duration,
16:15
Speaker 3: not take a huge amount of credit risk. I think
16:18
Speaker 3: that sort of captures a lot of what we're seeing
16:21
Speaker 3: investor interest in.
16:22
Speaker 2: Last question, how should investors be thinking about the fact
16:27
Speaker 2: that we have a new f OMC chair and Kevin Walsh,
16:31
Speaker 2: what does that mean in terms of thoughts about duration,
16:35
Speaker 2: especially given how hawk ish so many members of the
16:39
Speaker 2: committee are and how publicly he stated he's interested in
16:45
Speaker 2: FED cuts.
16:46
Speaker 3: Well, and this gets to something we've talked about in
16:49
Speaker 3: the past, Barry, which is, you know, the market itself
16:53
Speaker 3: has already priced in what it thinks will happen.
16:56
Speaker 4: So the real.
16:56
Speaker 3: Question is less about who's you know, at the head
17:00
Speaker 3: of the FED right now, more about if you look
17:03
Speaker 3: at where the market's pricing fed action. Meaning we talked
17:07
Speaker 3: about this early in the conversation. We went from cuts
17:10
Speaker 3: to you know, a high priced end this year and
17:12
Speaker 3: maybe more next year. Do you, as an investor believe that, right?
17:16
Speaker 3: And that's the question because if you look at the
17:19
Speaker 3: futures contracts, or if you look at the shape of
17:22
Speaker 3: the yl curve, you have to make up your mind
17:24
Speaker 3: do you believe that or not. If you don't believe it,
17:26
Speaker 3: you know, are you more hawkish than that? Are you
17:28
Speaker 3: more worried about inflation than that? You may want to
17:30
Speaker 3: rain in your duration risk if you think that that
17:33
Speaker 3: none of that's going to materialize, and then you could
17:35
Speaker 3: even go back to cuts. You may want to move
17:38
Speaker 3: out further on the curve. However, for many investors, if
17:41
Speaker 3: you don't even want to try to call that again,
17:45
Speaker 3: just be diversified, right, so you know, maybe just sort
17:49
Speaker 3: of anchor in the middle part of the of the curve,
17:52
Speaker 3: the intermediate duration. Don't go all the way to the
17:54
Speaker 3: short end, don't go all the way to the long end.
17:56
Speaker 3: You don't really know how this is all going to
17:58
Speaker 3: play out, and most investors aren't really interested in trying
18:01
Speaker 3: to predict that. So just get your exposure, lean into income,
18:06
Speaker 3: and then just you be patient.
18:09
Speaker 2: So to wrap up, investors who want some fixed income
18:13
Speaker 2: exposure have a variety of choices today that they didn't
18:17
Speaker 2: have just as recently as five years ago. It doesn't
18:21
Speaker 2: matter if it's mortgage backs, inflation, hedged, global ad domestic.
18:26
Speaker 2: Whatever you want in terms of exposure to fixed income,
18:31
Speaker 2: you can get that through bondyts. I'm Barry Ridolts. You're
18:35
Speaker 2: listening to Bloomberg's At the Money