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Speaker 1: Ah money is Diamon, and make money is diamond and

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Speaker 1: me money games donon and me money is Donon, and

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Speaker 1: make money is dimon and me money games common, and

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Speaker 1: me money is Domon and me money games common to.

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Speaker 2: Make Investors who are looking for yields were once required

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Speaker 2: to purchase individual bonds or mutual funds. Today ETFs have

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Speaker 2: changed the fixed income market just as surely as they've

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Speaker 2: changed the equity markets. Investors can purchase low cost bonding

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Speaker 2: tfs in just about any flavor you can imagine. I'm

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Speaker 2: Barry Ridults, and on today's edition of At the Money,

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Speaker 2: we're going to explain how fixed income investors can use

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Speaker 2: ETFs to their best advantage. To help us unpack all

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Speaker 2: of this and what it means for your portfolio, let's

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Speaker 2: bring in Still Lately. He's managing director at Blackrock and

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Speaker 2: Global head of I Shares Fixed Income ETFs. Previously he

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Speaker 2: was the head of I Shares Fixed Income Strategy. He

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Speaker 2: helps to oversee more than a trillion dollars in fixed

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Speaker 2: income assets. So Steve, let's just start simply why ETFs?

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Speaker 2: What are the advantages over bond, separately managed accounts or

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Speaker 2: mutual funds?

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Speaker 3: Good to see you, Barry, Thanks for having me. So

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Speaker 3: this has been a bit of a journey that spans

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Speaker 3: decades actually, and so to really understand the power of

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Speaker 3: bondi tfs, you have to kind of go back before

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Speaker 3: they existed.

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Speaker 4: So let's call that, you know, kind of late nineties.

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Speaker 3: The very first bondi tf came out in Canada into

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Speaker 3: the year two thousand and then in the US in

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Speaker 3: two thousand and two. But if you go back to

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Speaker 3: the nineties, buying bonds was a non trivial exercise, and

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Speaker 3: the way it was done it was a very much

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Speaker 3: voice driven market. Pick up the phone, you call several people,

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Speaker 3: you get several quotes, hoping the market's not moving on you,

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Speaker 3: at the same time, not quite sure if you exactly

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Speaker 3: got the best price. There was very little transparency et cetera,

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Speaker 3: et cetera, and kind of uneven access.

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Speaker 4: So depending on who.

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Speaker 3: You were and what kind of wallet you had, you

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Speaker 3: might get different treatment. And so that was a problem

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Speaker 3: for some investors, not for all. For investors who had access,

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Speaker 3: you know, maybe they viewed that as an advantage, but

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Speaker 3: for a lot of us it was really challenging to

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Speaker 3: build a high quality, diversified bond portfolio.

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Speaker 4: So what do bond ETFs do?

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Speaker 3: They actually opened that whole world up to transparency. You

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Speaker 3: basically now had not even a single bond, but a

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Speaker 3: portfolio bonds that trade on exchange. You know what's in it.

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Speaker 3: You could see the price on exchange every second ticking

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Speaker 3: buy so you don't have to pick up the phone

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Speaker 3: and call people. You just simply can trade on exchange

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Speaker 3: and you know you're getting the best price that's quoted

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Speaker 3: on exchange. Now, again, like anything, you have to use

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Speaker 3: proper discipline when executing orders, etc. But it was just

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Speaker 3: a shocking revolutionary thing to be able to trade bonds

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Speaker 3: on an exchange.

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Speaker 2: So that makes a lot of sense. I remember when

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Speaker 2: this market was very dealer driven, but there was always

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Speaker 2: an option, or at least over the past let's call

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Speaker 2: it forty years, an option of bond mutual funds. There

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Speaker 2: are obvious advantages for equity ETFs over equity mutual funds.

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Speaker 2: How does that translate to fixed income ETFs? What are

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Speaker 2: their advantages over fixed income mutual funds?

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Speaker 4: Well, there are a couple.

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Speaker 3: You know, mutual funds still play a role. You'll tend

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Speaker 3: to see them in four oh one k's and things

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Speaker 3: like that. That's more of an architecture thing. But away

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Speaker 3: from that, mutual funds price one one time a day

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Speaker 3: at the at the end of the day, right, so

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Speaker 3: you don't know in the middle of the day really

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Speaker 3: what the what the valuation is. And so I think

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Speaker 3: a lot of advisors and and investors have found the

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Speaker 3: idea of being able to trade intra day at a

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Speaker 3: known price really attractive because as you can imagine, you know, Barry,

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Speaker 3: let's just say you get you know, a strong inflation number,

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Speaker 3: or you know an employment reporter or what have you,

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Speaker 3: and you want to move on that. You can put

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Speaker 3: in an order for your mutual fund and sure that'll

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Speaker 3: get filled at the end of the day. You really

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Speaker 3: don't know what value BONDI TF you can just go

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Speaker 3: and exchange immediately and you can decide whether that's the

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Speaker 3: right price or not, and you can act on it.

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Speaker 4: So there's that.

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Speaker 3: The second part of it would just be the transparency

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Speaker 3: issue for mutual funds. You may you know, have you know,

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Speaker 3: quarterly reporting or what have you as opposed to daily

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Speaker 3: for most bondietfs, and that includes active strategies. So a

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Speaker 3: lot of investors are attracted that daily transparency as well.

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Speaker 2: And there used to be I don't know, tens of

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Speaker 2: thousands of mutual fund out on the fixed income side.

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Speaker 2: What sort of selection do ETFs present for bonds or

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Speaker 2: fixed income in the exchange traded fund wrapper.

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Speaker 3: Well, it's been exploding, particularly, I would say, since the

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Speaker 3: ETF rule in twenty nineteen, and then also you know

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Speaker 3: the pandemic and the subsequent policy responses I think unleashed

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Speaker 3: a whole new level of demand with the normalization and yields.

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Speaker 3: But standing here today, I think we're over a thousand

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Speaker 3: bond ETFs in the United States alone. I Shares has

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Speaker 3: over one hundred and sixty in the US. We have

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Speaker 3: one point three trillion assets in the US or sorry,

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Speaker 3: nine hundred over nine hundred billion in the US and

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Speaker 3: one point three trillion globally. But the selection is enormous

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Speaker 3: now and it spans not just asset class meaning treasuries, credit,

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Speaker 3: high yield, emerging markets, et cetera, but also within a

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Speaker 3: given asset class, you now have maturity cuts, you have

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Speaker 3: outcome overlays. On top of that, you have hedged products.

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Speaker 3: So it's been very very much built out, and you

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Speaker 3: also now have quite a lot of active strategies within

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Speaker 3: those asset classes or sectors.

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Speaker 2: One of the criticisms that the equity side of ETFs

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Speaker 2: always get is, well, just wait till the next crash

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Speaker 2: or period of stress. You'll see how poorly these perform.

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Speaker 2: That didn't happen during the pandemic crash. And then we

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Speaker 2: started hearing the same criticisms about fixed income ETFs. Just

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Speaker 2: wait till a moment of stress. How did ETFs perform

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Speaker 2: either in twenty twenty during COVID and how did fixed

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Speaker 2: income ETFs perform during the rate shot in twenty twenty two.

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Speaker 3: Yeah, and this is what I think really garnered the

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Speaker 3: next wave of adoption because over the years, if you

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Speaker 3: go back to you know, sort of the global financial crisis,

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Speaker 3: they existed then, and we did have a lot of

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Speaker 3: investors who were interested in them just because of this

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Speaker 3: idea that Okay, during a crisis, I can see where

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Speaker 3: things are trading on exchange, and Okay, that's valuable because

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Speaker 3: now I can look at an investment grade credit ETF

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Speaker 3: like LQUD or a high OLDTF like HIG during the

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Speaker 3: crisis and see what's happening, which is very hard to

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Speaker 3: do if you remember back then, So the criticism was, well,

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Speaker 3: they're small, they haven't been around that long. Not really

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Speaker 3: sure if I want to use them yet, I need

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Speaker 3: to see them get larger and go through.

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Speaker 4: More stress tests.

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Speaker 3: Okay, So between the global financial crisis and twenty twenty,

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Speaker 3: there were kind of minor bumps here and there, but

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Speaker 3: nothing severe. I think twenty twenty, especially February March, when

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Speaker 3: even you know, some treasuries and investment grade were struggling

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Speaker 3: to trade. I think that finally got people over the line.

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Speaker 3: Because at the worst of it, it was hard to

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Speaker 3: trade offer and treasure, it was hard to trade investment grade.

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Speaker 3: But ETFs, even though they may have been trading at

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Speaker 3: a discount, were tradable, and they were trading in record volume,

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Speaker 3: and I think that finally finally got a lot of

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Speaker 3: people over the hump.

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Speaker 4: That was the test they were waiting.

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Speaker 2: For, and they definitely passed with line collars.

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Speaker 3: Yeah, and then the rape shock was just icing on

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Speaker 3: the cake, you know, another stress episode, which which further

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Speaker 3: I think cemented investor confidence in the wrapper.

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Speaker 2: So let's move beyond the structure of ETFs and start

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Speaker 2: talking about fixed income investing in ETFs. Money markets are

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Speaker 2: three six, three seven, And as we're recording this, yields

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Speaker 2: went up a little bit today on non farm payroll data.

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Speaker 2: But you know, you're not that far off from four percent,

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Speaker 2: pretty competitive with the middle of the curve for bond yields.

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Speaker 2: Why should investors think about rolling out of money markets

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Speaker 2: and into bond ETFs in this rate and environment.

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Speaker 3: And this this is the question, and I think it

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Speaker 3: doesn't have to be a binary choice, right, So what

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Speaker 3: we've been saying is that, you know, if you think

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Speaker 3: about what sort of happened with views on the FED

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Speaker 3: over the last you know, call it six months, it's

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Speaker 3: changed a lot, right. We went from having some cuts

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Speaker 3: priced in now we've got you know, as we're standing

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Speaker 3: here today, now we have a full hike priced in

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Speaker 3: by the end of the year. We have another one

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Speaker 3: priced in for next year, maybe more. And that could

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Speaker 3: change just as rapidly going the other way. And so

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Speaker 3: it's really less about you know, trying to time or

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Speaker 3: finesse this and more about just diversifying. So sure you're

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Speaker 3: gonna be able to earn decent carry in your money

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Speaker 3: market account right now, but as a diversifier, what we've

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Speaker 3: been saying is take at least some of that step

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Speaker 3: out on the curve. You know, let's call it intermediate,

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Speaker 3: you know, maybe three to seven years something like that,

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Speaker 3: because in the event that things do, for example, the

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Speaker 3: geopolitical picture could change very very rapidly. You could get

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Speaker 3: sort of oil prices receding, inflation kind of coming back down.

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Speaker 4: Et cetera.

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Speaker 3: That will get us back off to the races the

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Speaker 3: other direction. And you know, it's really funny, Barry, if

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Speaker 3: you look at the ten year yield over the last

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Speaker 3: three years, it kind of looks like a Siginn wave.

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Speaker 3: You've been you know, three sixty up to five and

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Speaker 3: everywhere in between, over and over and over again. And

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Speaker 3: so it's very very hard to time this right. So

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Speaker 3: just don't put all your eggs in one basket. Have

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Speaker 3: your bets, you know, sort of spread out on the curve,

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Speaker 3: because you never know how fast it will change.

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Speaker 2: Yeah, it's kind of fascinating talking about the reversals. How

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Speaker 2: long were we waiting for the FED to start cutting

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Speaker 2: and it seemed like it took years and years of

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Speaker 2: people being wrong, and now we're reversing, not only reversing

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Speaker 2: the idea of cuts, but given the war, given what's

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Speaker 2: going on inflation. It's amazing that it took such a

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Speaker 2: short period of time to price in two hikes. But

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Speaker 2: given where we are in the FED cycle, I don't

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Speaker 2: even want to say cutting cycle. What does this lack

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Speaker 2: of clarity mean for a fixed income investors? How should

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Speaker 2: they think about?

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Speaker 4: Are we cutting?

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Speaker 2: Are we raising? Are we going into a recession? Are

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Speaker 2: we not going into recession? It seems like it's been

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Speaker 2: especially confusing period.

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Speaker 3: Yeah, And this is what's really fascinating to watch is

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Speaker 3: that investors very interestingly, just based on the flows. You know,

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Speaker 3: we're having record flows, you know, yet again this year,

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Speaker 3: and that's on top of records prior several years. We

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Speaker 3: are seeing investors kind of look through this volatility and

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Speaker 3: so far, you know, I want to say that we're

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Speaker 3: up somewhere around twenty to thirty percent, I'm relative to

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Speaker 3: last year. So investors don't seem to be too concerned

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Speaker 3: by the dramatically, you know, kind of changing landscape here.

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Speaker 3: What they are focused on is the income opportunity. So

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Speaker 3: the majority have fixed income assets are now yielding above

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Speaker 3: four percent.

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Speaker 4: That was not the case.

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Speaker 3: I think it was something like twenty percent before before

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Speaker 3: the pandemic between the crisis and the pandemic, and so

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Speaker 3: investors are actually looking at this as an opportunity where

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Speaker 3: they can now earn income infixed income for the first

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Speaker 3: time in many years, and they're very focused on that

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Speaker 3: as opposed to just you know, the tenure, whether it's

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Speaker 3: at four or five percent. They're focused on the income

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Speaker 3: and so that's how they're allocating.

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Speaker 2: So we're talking a little bit about inflation. I would

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Speaker 2: be remiss if I didn't bring up the I shares

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Speaker 2: tips ETF. Our clients are owners of this. They've done

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Speaker 2: really well over the past couple of years. Tell us

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Speaker 2: a little bit about why people should think about having

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Speaker 2: a tips bond ETF in their portfolio.

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Speaker 3: Yeah, and it's it's proven to be really really powerful

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Speaker 3: because it was not expected. Everybody had pronounced inflation dead.

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Speaker 3: We saw it come roaring back, and then there was

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Speaker 3: the idea of very strong policy response to rein it

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Speaker 3: back in. Now we've gotten a supply shock and energy,

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Speaker 3: which is sort of you know, thrown things a little

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Speaker 3: bit in doubt again, and so it goes, you know,

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Speaker 3: to the point that you should have a resilient portfolio,

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Speaker 3: and that resilience some of which has to be anchored

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Speaker 3: in try to protect against inflation. And so it's up

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Speaker 3: to the investor to decide how much or how little

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Speaker 3: they want to lean into that. And so you can

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Speaker 3: buy individual tips bond ETFs like s t I P

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Speaker 3: or t I P. We even have a shorter one

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Speaker 3: which is one year, called ICPI if you really want

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Speaker 3: to just peg inflation itself. But I think other exposures

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Speaker 3: are now incorporating it. So you know, we just we

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Speaker 3: just launched late last year a broader bond ETF. So

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Speaker 3: you think of the AG the universal, we have something

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Speaker 3: called the total which is BTOT that includes an inflation component.

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Speaker 3: So the AG in the universal don't have that.

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Speaker 4: This one does.

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Speaker 3: And that is a nod to the idea that going

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Speaker 3: forward you probably want to have some protection against inflation.

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Speaker 3: It'll wax and wane, but I think you know it

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Speaker 3: shows you now that it's necessary.

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Speaker 2: So tips are one sort of opportunity that's in the

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Speaker 2: fixed income ETF area today. What other areas are attractive?

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Speaker 2: Do you like? Investment grade corporates, high yield munis, even

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Speaker 2: agency mortgages and active bond e tf's what what do

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Speaker 2: you see the greatest opportunity set in in the world

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Speaker 2: of ETFs and fixed income.

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Speaker 4: So let's do that in two steps.

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Speaker 3: I think overall, you know, I think you want to

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Speaker 3: be in sort of that high quality tilt right for

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Speaker 3: many investors, that is, that is a comfortable thing from

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Speaker 3: a risk profile standpoint. So getting back to the two

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Speaker 3: dimensions here, credit and duration.

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Speaker 4: So credit we were.

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Speaker 3: We've seen the flows go mostly into very high quality

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Speaker 3: so I think treasury's investment grade, et cetera, but also

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Speaker 3: kind of that intermediate duration component as opposed to being

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Speaker 3: much longer in the curve. So investors are sort of

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Speaker 3: anchoring on high quality intermediate duration. Away from that, what

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Speaker 3: also has been getting a lot of interest, you know,

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Speaker 3: going back to the income theme, investors really like what

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Speaker 3: we're calling these plus sectors. And what that means is, Okay,

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Speaker 3: outside of treasuries and investment grade, what do you have.

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Speaker 4: Yeah, you have high yield.

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Speaker 3: And emerging markets that may not suit all investors, but

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Speaker 3: you also have things like securitized assets which offer you know,

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Speaker 3: a pretty attractive income profile relative to relative to their

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Speaker 3: duration risk, et cetera. And so you know, think of

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Speaker 3: that as mortgages are one part of that, but then

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Speaker 3: you can also have asset backed securities, commercial mortgage backed securities,

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Speaker 3: things like that. So securitized assets have been really popular

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Speaker 3: as well.

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Speaker 4: On the active side, as you know.

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Speaker 3: Rick Reader launched a multisector income ETF called b I

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Speaker 3: n C Bank has exposure to a lot of those

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Speaker 3: plus sectors, and that fund has proven to be enormously popular. Again,

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Speaker 3: that income theme without taking outsized risk. And so it's

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Speaker 3: that sort of general theme, let's lean into income, deemphasize duration,

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Speaker 3: not take a huge amount of credit risk. I think

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Speaker 3: that sort of captures a lot of what we're seeing

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Speaker 3: investor interest in.

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Speaker 2: Last question, how should investors be thinking about the fact

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Speaker 2: that we have a new f OMC chair and Kevin Walsh,

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Speaker 2: what does that mean in terms of thoughts about duration,

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Speaker 2: especially given how hawk ish so many members of the

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Speaker 2: committee are and how publicly he stated he's interested in

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Speaker 2: FED cuts.

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Speaker 3: Well, and this gets to something we've talked about in

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Speaker 3: the past, Barry, which is, you know, the market itself

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Speaker 3: has already priced in what it thinks will happen.

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Speaker 4: So the real.

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Speaker 3: Question is less about who's you know, at the head

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Speaker 3: of the FED right now, more about if you look

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Speaker 3: at where the market's pricing fed action. Meaning we talked

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Speaker 3: about this early in the conversation. We went from cuts

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Speaker 3: to you know, a high priced end this year and

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Speaker 3: maybe more next year. Do you, as an investor believe that, right?

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Speaker 3: And that's the question because if you look at the

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Speaker 3: futures contracts, or if you look at the shape of

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Speaker 3: the yl curve, you have to make up your mind

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Speaker 3: do you believe that or not. If you don't believe it,

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Speaker 3: you know, are you more hawkish than that? Are you

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Speaker 3: more worried about inflation than that? You may want to

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Speaker 3: rain in your duration risk if you think that that

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Speaker 3: none of that's going to materialize, and then you could

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Speaker 3: even go back to cuts. You may want to move

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Speaker 3: out further on the curve. However, for many investors, if

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Speaker 3: you don't even want to try to call that again,

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Speaker 3: just be diversified, right, so you know, maybe just sort

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Speaker 3: of anchor in the middle part of the of the curve,

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Speaker 3: the intermediate duration. Don't go all the way to the

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Speaker 3: short end, don't go all the way to the long end.

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Speaker 3: You don't really know how this is all going to

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Speaker 3: play out, and most investors aren't really interested in trying

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Speaker 3: to predict that. So just get your exposure, lean into income,

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Speaker 3: and then just you be patient.

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Speaker 2: So to wrap up, investors who want some fixed income

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Speaker 2: exposure have a variety of choices today that they didn't

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Speaker 2: have just as recently as five years ago. It doesn't

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Speaker 2: matter if it's mortgage backs, inflation, hedged, global ad domestic.

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Speaker 2: Whatever you want in terms of exposure to fixed income,

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Speaker 2: you can get that through bondyts. I'm Barry Ridolts. You're

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Speaker 2: listening to Bloomberg's At the Money