The Nasdaq-VettaFi Asset Allocation Summit this week included insights from leaders at key asset managers discussing the major decisions that advisors are facing. With costs rising and many investors at or near retirement, fixed income and income ETFs, specifically, took up a big part of the conversation. Leaders from BlackRock, WisdomTree, and Fidelity Investments all shared their views on both the fixed income outlook and the use cases for fixed income ETFs right now.
Key Takeaways:
- With the yield market seeing big changes, fixed income ETFs offer plenty of strong use cases.
- Asset manager leaders pointed to various opportunity areas on the yield curve, with the middle part of the curve appealing.
- ETF innovation also offers opportunities with advancements in income-generating ETFs.
Hosted by VettaFi Head of Research Todd Rosenbluth, the summit included insight from BlackRock U.S. Head of Equity ETFs Jay Jacobs, Fidelity Investments Head of U.S. ETF Strategy Dominic Maister, and WisdomTree Head of Distribution Americas, Joe Grogan. The trio answered Rosenbluth’s questions across a range of topics, including the present and future of fixed income ETFs.
Maister set the stage by contrasting past and present views on fixed income, noting that a few years ago critics had declared the 60/40 portfolio dead, but today, he said, it has a compelling case.
“I think today as you look out and you see that the 10-year is at 5.25%, I think there’s a much bigger reason to own fixed income in a portfolio today, whether it’s for the yield, whether it’s for the traditional ballast,” he said. “As equity markets increase in volatility, usually fixed income will provide a ballast to that. That’s not something that we had in 2022 when rates were near zero.”
What to Know About Fixed Income: Top Firms Speak
Grogan, of WisdomTree, broadly agreed. He identified a trend of some investors trying to “play the duration game,” and cautioned against it.
“It’s been a dangerous game. It’s almost akin to sort of market timing. We sort of like the short end of the curve right now that’s going to keep up,” Grogan said. “Look at floating rates and so forth because that’s going to keep up with the rate quicker than a 10-year will.”
Jacobs, meanwhile, suggested that while a strong diversifier long term, spikes in correlation between stocks and bonds in the short term may be failing to diversify portfolios. As for where to look right now, he pointed to the medium term.
“If you’re looking seven years out in corporate markets, you can get about 7% yield right now and so a lot of investors are looking to lock in that yield,” he said. “We see people using iBond ETFs, which are term-matured ETFs. You can pick a specific spot on that yield curve like, say, 2032, 2033, target the middle of the curve for credit, lock in a 7% yield.”
Fixed Income ETFs: Income Innovation
Each firm, of course, offers ETFs that provide exposure to all parts of the yield curve. Their ETF suites also include income ETFs that can help investors deal with rising costs. Jacobs’ BlackRock offers those iBond ETFs, but also income ETFs like the iShares NASDAQ Premium Active Income ETF (BALQ). Jacobs explained that not only older but also younger investors may want some income. Premium income strategies, he explained, sell volatility to infuse income into portfolios.
“I think about BALQ as portable income,” Jacobs said. “It’s designed to give you the return experience of the NASDAQ 100 with income in the 9% range. The way that we do it is we get exposure to NASDAQ 100 names, we overwrite a portion of the portfolio using covered calls.”
See more: What to Make of Senior Loans? Key Points as Yields Rise
Maister, meanwhile, discussed some managed futures and CLO ETFs that Fidelity offers. While of course the firm offers its core bond funds, it also has income generating funds. He pointed to ETFs like the Fidelity AAA CLO ETF (FAAA) as income generators.
“So these are very low interest rate sensitive products. They have yields that reset sort of every 30 days,” he said. “We do like those types of ideas as income producing alongside the core bond exposure.”
Together, the three perspectives underscore the value of a growing, innovative fixed income ETF landscape. From income ETFs to bond funds, CLOs to premium sales, fixed income ETFs can boost portfolios at a time when fixed income is more relevant — and helpful — than it has been in years.
Originally published on Advisor Perspectives.
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