Looking For Yield
In the "Looking for Yield" panel at the Morningstar ETF Invest conference, panelists got to hear from Fran Kinniry from Vanguard, Ed McRedmond from PowerShares, and Don Suskind from PIMCO. Today's clients are fixated on the need to find yield-producing funds for their portfolios. The panel focused on how the different strategies used by their firms can help advisors find that yield in a low-cost, diversified ETF product.
As a firm, Vanguard believes that equities offer better opportunities for investors than low-yield government and corporate bonds. There, outlook for equities is for returns in the 9%-10% range and aggregate bond returns in the 2%-3% range. Kinniry is skeptical of portfolios that focus too much on yield and give up diversification in the process. There are many dividend-focused ETFs, and he feels that the extra yield is not worth the increased sector risk you are taking.
Build America Bonds are a new asset class that has seen incredible investor interest. Initially, yields were substantially higher than comparable corporate bonds. Yields have come down as investors have become more familiar with the security. Build America Bonds are a form of taxable municipal debt, and, historically, their credit quality has been much better than corporate bonds. With the current budget problems of state and local governments, it is uncertain which type currently has the better credit profile.
Local-currency emerging-market bonds are an opportunity, but investors need to be aware that the foreign currency volatility will be greater than the underlying bond's volatility. PIMCO currently sees the best opportunities in Brazil, Mexico, and South Korea. The current deleveraging, re-regulation, and protectionist policies are creating a "New Normal" where returns of all asset classes are reduced. PIMCO feels as though deflation is becoming a bigger possibility on the short end of the yield curve and higher inflation is the biggest risk on the long end.
-- Tim Strauts
BlackRock's Tucker: ETFs Have Created "A Better Bond Market"
BlackRock's director of fixed income, Matt Tucker, capped the Morningstar ETF Invest Conference Friday with a presentation on the benefits and challenges investors and advisors have faced as ETFs have sought to incorporate fixed-income holdings in recent years. While the popularity of ETFs surged in the past decade, bonds’ illiquidity made them, structurally, a difficult fit for an ETF shell.
"It was something a lot of people said could not be done," Tucker said. "There were a lot of press reports back then about how you simply couldn't take the over-the-counter bond market and make it function in an ETF."
However, in recent years, inflows into fixed-income ETFs reveal that many investors are beginning to prioritize the advantages ETFs provide over other investment vehicles, such as mutual funds, over their shortcomings. Specifically, Tucker said, investment professionals have found that ETFs' precision, liquidity (of the ETF itself, not of its holdings), and efficiency can provide advantages in fixed-income investing.
"These are things that basically didn't exist in the fixed-income market prior to the advent of ETFs," Tucker said.
"What ETFs have done is bring, for the first time, a liquid, tradable, diversified basket of products that you can actually trade. And ETFs have increased that access across all different dimensions of fixed income."
According to Tucker, ETFs also offer a solution to the lag between an order to sell and the actual transaction, and, given the variety of bundles and packages they offer, remove much of the uncertainty involved with selecting specific fixed-income holdings or narrowly focused packages of holdings mutual funds offer. Additionally, ETFs have created a centralized marketplace for trading fixed-income holdings, something equities have enjoyed for generations thanks to stock exchanges.
In short, ETFs have opened the door to personalizing the fixed-income investing experience, just as they have done for equities.
"(ETFs offer) a better bond market," he said. "It's a way to actually control costs better. You can see liquidity, and see a two-sided market for transactions. You can access the diversification. You can access liquidity when you need it. That’s the big difference."
-- Mike Brennan