Fixed income ETFs may be the way to go as markets brace for higher rates

00:00 Speaker A

Joining us for more is Todd Rosenbluth, TMXfy, head of research as part of our ETF report sponsored by Pimco. Todd, it’s good to see you.

00:11 Todd Rosenbluth

Great to be here.

00:12 Speaker A

Um, I found it really interesting something that you flagged, which is an influx into fixed income ETFs. And I’m surprised by it because the price action has not been that way, right? We have been seeing yields go up, prices go down, at least in the Treasury market. But of course, the fixed income universe is a lot bigger than that. So what are we seeing, how are we seeing investors position?

00:37 Todd Rosenbluth

You’re right. Actually, last week we hit a record of net inflows for fixed income ETFs for a calendar year. It’s still mid-September. So we’ve got Right. many months to be able to go. That’s exciting that we’ve seen over $450 billion dollars of net inflows. It’s a healthy waiting of the overall 1. nearly $5 trillion of money that’s gone into ETFs thus far this year. What we’ve seen is people have been focusing on the short-term. Uh so Sgov, which is an iShares ETF has been the most popular of the ETFs. We’ve also seen investors embrace actively managed short-term fixed income ETFs, T-box, which is a T-Ro Price ETF, Mint, which is a Pimco ETF. Those are a couple of other of those actively managed fixed income ETFs as investors are getting more comfortable in using the ETF wrapper to get fixed income exposure.

01:31 Speaker A

Okay, so what does that tell you, the flows that you’ve seen? What does that tell you about how investors are positioning and what they’re thinking about in terms of what the Fed’s going to do?

01:43 Todd Rosenbluth

So, I think as you said, the market has priced in that the Fed is going to begin raising rates. So the best way to protect your portfolio is to focus on the shorter term, get 3 and a half percent yield hiding out largely in cash with a product like Sgov or Mint or T-box. And then position appropriately. We’ve also seen interest in floating rate bond ETF. So Wisdom Tree has USFR as one of the more popular of those products. Floating rate bond products will adjust naturally as the Fed adjusts interest rates. and so we’ve seen demand for those type of products, too.

02:29 Speaker A

Um, and it’s interesting what you said that the total flows this year have been $450 billion. Is that an unusually high proportion of the overall flows into fixed income specifically?

02:44 Todd Rosenbluth

Yes. So fixed income ETFs are roughly 20% of the overall base of of assets, a little bit under. Um, and so $450 billion is out of close to $1.5 trillion. I’m going to try to do the math on the fly here. is close to a third of the overall flows. So it’s it’s higher. We’ve also seen people been rotating in light of the interest rate environment towards more value-oriented strategies in the equity marketplace. Value tends to do a little bit better during a rising rate environment.

03:22 Speaker A

So people are definitely getting ready for it. They’re definitely bracing for it.

03:26 Todd Rosenbluth

Yeah, we’ve seen that and we’ve seen some products like Schwab has a fundamental US large company ETF, FNDX. This is a value strategy uh that rebalances periodically. It takes fundamentals into account, company uh cash flow and sales. So as opposed to just riding the value up uh as stocks continue to climb higher. This Schwab ETF gives you more diversification.

03:59 Speaker A

I’m curious because active actively managed ETFs have been such a growing part of the ETF universe. Has an ETF like that been tested in a rising rate environment before? Like are are most of the products newer that haven’t been through some cycles or have they?

04:21 Todd Rosenbluth

So in the active fixed income space, we’ve seen a little bit more uh history. Actively managed equity ETFs have increasingly been gaining traction. Um I’m intrigued to be able to see how these uh options income products. So, uh JEPI from JP Morgan, JEPQ, another product. Uh Neos has a suite of products. They’ve been gaining traction the past year or two. Obviously we’ve had lower rates. As the Fed raises interest rates, do the 6, 7, 8% yields that are appealing to investors uh that have been appealing, do they remain uh in focus or is there a shift towards the higher yielding fixed income products.

05:13 Speaker A

Right. I guess we’ll find out. Um and then I also want to I want to ask you about tech because Bloomberg highlighted a stat from um Barrett Strategus that since the S&P bottomed, there’s just been an overwhelming flow into information technology at the expense of everything else. I think they said what it was like $13 has gone into IT for every dollar invested in everything else. Um you know, have you guys seen that too? Where is it going? And is it just that everybody is still super bullish on on this theme?

05:58 Todd Rosenbluth

Uh so, yes, the short answer is people are still very bullish. We’ve seen uh the Q’s uh and QQQM, which is a close to technology. It’s technology and and communication services and and consumer discretionary. That’s been very popular. The technology sector ETF, uh XLK has been popular, but we are starting to see investors as the AI trade has faltered a little bit. People are still looking at thematic ETFs, but in a more diversified manner. So there are some other thematic ETFs. So Rex has a drones ETF, DRNZ, uh that has caught our eye for people who want a more modern technology way of having defense spending. We’ve had uh BTT, which is an amplified ETF. That’s battery and technology. So more alternative uh energy approach to investing. So you’re going to get tech but not exactly the same tech that you’d find you showed earlier about the software companies. You’re going to get a bit more diversification in a thematic approach with those type of ETFs.

07:22 Speaker A

Um I was just at the future proof conference as you know, a lot of ETF providers are there trying to convince people to buy and a lot of ETF provide providers reflects like the hugeness of this industry now. Um and I know Cynthia Murphy, your colleague is out there. What what are you hearing from her in terms of like the ETF lens on that on that crew?

07:52 Todd Rosenbluth

Yeah, so advisor adoption of ETFs continues to increase. Uh that’s this is an advisor conference and so ETF providers are there doing education. We’ve seen record number of products that have come to market, so you want to educate about that. It is still comes down to distribution and do people understand your products and because we’ve got a growing number of them. But it’s just really exciting to see the ways asset managers are educating about their ETFs, both in person and through virtual events.

08:31 Speaker A

Yeah. All right, Todd, good to see you. Thanks for coming in. Appreciate it.

08:34 Todd Rosenbluth

Thank you.