Outlook For Fixed Income ETFs In 2019

February 13, 2019

The Federal Reserve may be on pause, but there’s no way to know with certainty what its next move will be.

Global growth is slowing now, but that may not remain the case if the U.S. and China make a trade deal.

The yield curve has flattened, but that doesn’t mean you should completely shun duration in your portfolio.

These were some of the points raised in an early-afternoon panel on fixed income at the Inside ETFs conference in Hollywood, Florida. Guided by moderator Tom Lydon, five fixed-income experts discussed a broad range of topics over 50 minutes, including advice on how investors should position their portfolios in 2019.

Is The AGG Flawed?

An area of disagreement among the panelists concerned whether the Barclays Aggregate Bond Index is flawed. William Housey, senior portfolio manager at First Trust Advisors, and Gene Tannuzzo, deputy global head of fixed income at Columbia Threadneedle Investments, argued that the AGG is indeed flawed.

“It makes up less than half of the global bond market, and the yield-versus-duration combination doesn’t seem attractive,” argued Tannuzzo, while noting that the AGG’s yield of 3% and duration of six years weren’t compelling.

Tannuzzo and Housey suggested that using active or rules-based alternatives to the AGG could result in better outcomes for investors.

On the other hand, Jason Singer, head of fixed-income ETFs at Goldman Sachs Asset Management, had a different perspective.

“I don’t think the benchmark is flawed,” he said. Rather, it’s about what end-users want.

“If you’re looking for a blunt instrument, [ETFs tied to the AGG] get that exposure at a price point,” Singer added. “To the extent people are looking to change that market risk, that’s where active management comes into play. One is about exposure, one is about exposure plus alpha. It depends what you’re looking for.”

Liquidity

A big concern about fixed-income ETFs has been the idea that when markets turn volatile, liquidity will dry up, leading to a breakdown in those products that hold relatively illiquid underlying securities.

But the panel argued that those concerns are overblown and that the action in December proves it. Rather than run away from those types of fixed-income ETFs in December, investors embraced them, and actually used them for liquidity.

Overall, fixed-income ETFs had inflows of more than $16 billion in December, and $15.5 billion in January, according to data from FactSet.

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