Recent U.S. inflation data is fueling speculation the Federal Reserve’s hiking cycle has run its course. Andres Rincon, Head of ETF Sales and Strategy at TD Securities, says fixed income ETFs are benefiting from the Fed’s potential pivot.
Greg Bonnell: Well, more signs of cooling inflation suggest the Fed may be done hiking rates, that the cycle has come to an end. Of course, that’s been pushing markets higher in recent sessions. But has that led to a shift in how investors are positioning themselves? Joining us now to discuss, Andres Rincon, Head of ETF Sales and Strategy at TD Securities. Andres, great to have you back on the program.
Andres Rincon: Thank you for having me.
Greg Bonnell: I always love talking to you about the fund flows, this trying to figure out where the market’s moving, where investors have their heads. What are we seeing in this environment now? Because for a long time, we were pretty cautious.
Andres Rincon: It’s all been about fixed income. And what’s really interesting, you mentioned earlier, we’ve seen a complete shift from both our advisor and retail investors, and also institutional, into fixed income ETFs. And call it two-thirds of the flows we’ve seen in Canada this year have been into fixed income ETFs. So that’s about $20 billion.
So it’s pretty impressive. And what is really interesting is that the direct investing channel has really taken up interest in the fixed income world. For the longest time, it remained dormant with interest rates being so low. But with interest rates now being higher, a lot of these products are offering very attractive yields.
And it’s interesting to see mom and pop every single day or the active trader. First thing they do is look at a fixed income ETF. And it’s really, really interesting for us to see that shift.
And it’s been mostly, of course, on the short end of the curve because it’s paying quite a bit. So you’re calling treasuries, HISA ETFs, money market ETFs, ultra short-term bond ETFs. That’s where a big part of it is. About 40% is going there. And then you have a portion that’s going to your traditional ag. That’s your broad market, call it, fixed income. But you’re also seeing some money now go into the long end of the curve.
So it’s a bit of a barbell exposure, where you get a lot of money in the short end, a lot of money in the long end. And that long-end exposure really is being taken up by a lot of retail and wealth investors and also institutions originally to hedge some exposure against rates declining and also a meltdown in the market, if it ever really happens. So it’s an interesting dynamic that we have right now on both sides of the curve.
Greg Bonnell: You mentioned HISA ETFs, those high-interest savings account ETFs. Recently, our regulator, OSFI, up in Ottawa, decided to change some of the rules around that. Walk us through what actually they did at OSFI and what impact you’re seeing so far on the market.
Andres Rincon: Yeah, it’s actually a little bit complicated. So I’ll stay fairly —
Greg Bonnell: Let’s do 10,000 foot up.
Andres Rincon: — high level. Yeah, exactly. So they’ve been reviewing these ETFs for several months now. And the review really stems from the liquidity provisions that these ETFs receive. And the liquidity provisions really stem from whether the stickiness of these funds — how closely retail they are. Is there institutional money coming into these funds? Can the investors pull out that money any time they want?
So they have a variety of factors. And they’ve determined after a long review that these products should be considered as institutional money, although most of it is actually retail money. I would say 90% plus is retail. But because it’s in an ETF format or mutual fund format, and they can go in and out, they’ve decided that this should be considered a deposit like an institution.
As a result of that, what we will see starting in February — so at the end of January is when it takes effect, we’ll see, very likely, a drop in the rate as the liquidity treatment for these ETFs will change. Now, the drop in the rate will be fairly minimal. We expect about 50 beeps or so. That’s still to be determined. But we do expect this space to remain very attractive at those rates and also to be very popular because they’re just bank deposits. So they’re relatively safe in this environment.
Greg Bonnell: Okay, so interesting changes there. Lots of things happening in the ETF space every time we get a chance to catch up. Also, this trend that I wasn’t aware of — mutual funds apparently converting to ETFs and a bit of a different situation south of the border compared here to Canada. Walk me through that.
Andres Rincon: Yeah, they’re creating a lot of news in the US because you have very big mutual fund companies, or traditionally mutual fund companies — some of them also already have ETFs. But they’re now converting a lot of their signature large mutual funds into ETFs. And you might ask yourself, why are you not seeing that in Canada? And it’s because the rules in Canada are different to those in the US. In Canada, you are already allowed to launch an ETF series of an existing mutual fund. So there’s no need. It’s already allowed. Anybody can do it. That’s been the case for the longest time here in Canada. So you often have a mutual fund and ETF are the same fund in both structures.
In the US, that structure where you have the ETF class was really patented by Vanguard and only Vanguard. And that patent actually expired recently. But you still have to apply to the SEC to get into that structure. So what a lot of the issuers in the US have done is actually, instead of going that route and having to fight with the SEC, they’ve actually converted some of their very large mutual funds into ETFs.
Now, that’s also fairly complicated in how you do that. But what that allows them is to enjoy many of the benefits of the ETF structure and keep all of their assets, most importantly, right? So we’re seeing a lot of these big, big issuers, like a Fidelity and some other big players, convert a lot of those into ETF structure, obviously growing the ETF pie as it goes.
Greg Bonnell: Does the investor have anything to be mindful of if a fund converts from one thing to the next? Is it really something on the institutional side?
Andres Rincon: No, this is actually mostly on the retail side. And really, they don’t have to be mindful of a lot. This has to go through a voting process, which is why I say it can get complicated. And not every single mutual fund can actually do this.
So the investor has to be mindful that they will have to vote for this transition. And if they do, then what ends up happening is, that same day, their mutual fund will convert to an ETF. And then what they have to understand is that, if they want to sell it, they can sell it in the market as any other ETF.
Greg Bonnell: Okay, interesting stuff. Of course, viewers of the show will know you’re a regular guest on MoneyTalk Live. But of course, Andres hosts his own program. It’s called Buyside Views. He looks at some of the big trends in the investment industry. In the latest episode, he was joined by Samir Dhrolia, a senior managing director for Global Derivatives Trading and Index Portfolio Management at the British Columbia Investment Management Corporation. So they discussed the rise of centralized trading. Have a listen to this.
Samir Dhrolia: So if you, for example, have a portfolio manager that is desiring to buy Google (GOOG, GOOGL) stock, they could buy it using call options. They could buy just the stock directly. They could buy a swap on that product.
A centralized trader will be able to look at all of the different ways of executing that order and optimizing it and delivering to the portfolio manager and saying, this is the best way you can execute this. And she may want to go with a swap. She may want to use the option structure instead. So this is where this broad skill sets of traders in a centralized framework are able to add value.
Greg Bonnell: Okay, so first I’m going to say, I love that couch. It looks very comfortable.
Andres Rincon: Of course — It is very comfortable, yes.
Greg Bonnell: But there are some interesting things being said, Samir sort of explaining centralized trading, so a very interesting space.
Andres Rincon: Yeah, look, if you’re a big asset manager or a pension plan, most of them actually have centralized trading or are transitioning to centralized trading. And this is a — not necessarily new, but we’re seeing a big push recently onto this platform. And basically what it means, as he tried to explain it, is you have multiple regions, multiple asset classes. And instead of them being traded separately by region and by asset class, they’re all being traded at a central desk.
And that has many, many benefits for a lot of the large asset managers across the world. And I think this is interesting for your audience too. We have a lot of active traders — active trading TD platform too. But you have a lot of traders on your platform. And those that want to learn a little bit about trading and how some of the larger or the largest shops in the world do this, this is a great video for them. And for those of you that are listening, we are on Google Podcasts, Apple Podcasts, and Spotify. And you can find us at TD Buyside Views.