Author: Nick Peters-Golden

USFR – The ABCs of FRNs: Get Floating Rate Note Yields in USFR

Treasury yields are all the rage right now, but with the Fed’s rate hikes continuing this week, getting the right exposure to Treasuries is important. As eyes turn towards short-duration Treasuries, it may be worth revisiting the ABCs of FRNs, or floating rate notes a unique flavor of Treasury offering available via the WisdomTree Floating Rate Treasury Fund (USFR) and its indexed approach to providing floating rate note yields.

Investors and advisors on the lookout for a way to play Treasury yields are increasingly looking at USFR, according to VettaFi’s advisor engagement data, with engagement for the ETF up 155% year over year (YoY). As inflation persists despite the Fed announcing yet another hike Wednesday, it remains a play popular with some advisors for the duration of the rising rate and inflation fight.

For more on inflation and FRNs: Hot Inflation Numbers? Eye Floating-Rate Treasuries

How do FRNs work, though? FRNs were introduced back in 2013 as the first new Treasury product since the Treasury Inflation-Protected Security (TIPS) in 1997. FRNs float, allowing their interest payments to change over time – rising as interest rates rise, and falling as interest rates fall.

Indexed to the most recent 13-week Treasury bill auction high rate, specific factors like the terms and conditions, as well as issue date and offering amount, are set before each auction, with initial auctions held for two-year FRNs in January, April, July, and October.

Functionally, an FRN is a bond, with many FRNs offering quarterly coupons that pay interest four times a year, though others pay monthly, semiannually, or annually. All that said, there is no guarantee the FRN rate will rise as fast as rates do overall in a rising rate environment like this, with so much dependent on the benchmark rate’s performance itself. That does mean that an investor holding an FRN still has some interest rate risk if the rate doesn’t keep up sufficiently.

In closing, FRNs tend to have less volatility and price valuations when rates rise as other fixed-rate bonds lose value, though due to the variable rates, coupon payments are sometimes unpredictable – advisors and investors would do well to check the maximum and minimum interest rates paid by each note, with some floating notes having caps and floors.

USFR presents a strong option when looking to get at floating rate note yields. Charging just 15 basis points, the strategy has returned 2% over the last six months according to YCharts, and may be a strategy to watch for FRN education and yields in the crucial weeks ahead for the inflation fight and ongoing uncertainty.

For more news, information, and analysis, visit the Modern Alpha Channel.

QGRW – Look to a Quality Strategy for Now – and the Long Term

For advisors who were tired of the Federal Reserve’s fight against inflation and its impact on the economy, the last week’s bank crisis may be the straw the breaks the camel’s back. Investors of all stripes still want an equity exposure, whether those nearing retirement or clients just starting out. That could set up a quality strategy to be an appealing option for now or the long term in an ETF like the WisdomTree U.S. Quality Growth Fund (QGRW).

Hear from a WisdomTree leader on the firm’s view on dividends here

Quality may make sense right now given the volatility markets are seeing, as high-quality stocks tend to outperform the market with less volatility. Factors like defensiveness in crisis and resilient behavior across the behavior cycle could be really useful right now, and when combined with long-term outperformance as the main characteristics that define quality, they could make a powerful strategy for near and longer terms.

Such characteristics also position a quality investment to perhaps serve as a core allocation, too. Sure, investors could hold your standard, broad-index ETFs that are going to take Federal Reserve, rising rate, or bank crisis pain straight to the face, but by adding quality to a core portfolio, that pain can be notably mitigated. As an investment factor, quality has been steady — steadier, one could argue, than even much-vaunted styles like low volatility or high dividend strategies.

Read more on combining quality with dividends here

Considering these factors, it might be worth taking a look at an up and coming quality strategy like the WisdomTree U.S. Quality Growth Fund (QGRW). QGRW has not only seen some solid returns YTD, returning 15.5%, but also 5.2% over the last week as all eyes have turned toward the bank crisis. QGRW invests in 100 large-cap growth firms in a market cap-weighted index with the strongest quality characteristics.

Charging 28 basis points, the strategy compares well to its core allocation rivals when considering its factor-based approach. While it is a relatively new strategy that launched back in 2022, its holdings include very liquid names that make the strategy quite liquid on its own, with firms like Visa (V) and Microsoft (MSFT) easy to get into and out of for the strategy. For those investors looking for a quality strategy for near and long terms, QGRW may be one to watch.

For more news, information, and strategy, visit the Modern Alpha Channel.

DIVI – Core Dividend ETF DIVI Sees 9,900% Engagement Jump

Yes, you read that right – the Franklin International Core Dividend Tilt Index ETF (DIVI) has seen a massive uptick in engagement from advisors, according to VettaFi’s data, at 9,900% year-over-year. The core dividend ETF launched back in 2016 and currently holds $214 million in AUM, which suggests that this jump in engagement may not be noise from a recent launch.

DIVI has, however, seen its net inflows spike amid the last half year’s spike for dividend strategies. The strategy has seen $185 million in net inflows coming over the last six months, with a large majority of that ($142 million) coming in over the last three months, particularly.

Dividend interest has certainly grown due to volatility going back to the end of last year, as issuers have looked to offer advisors and investors current income amid the dual challenge of persistent, sticky inflation and rising rates at the Federal Reserve.

Check out an interview with an ETF leader at Franklin Templeton here: Franklin Templeton’s Mann on 2023, Smart Beta, Income

DIVI is an active strategy, which may be picking up on a strong start to the year for active ETFs, too. Charging nine basis points, DIVI applies a dividend yield to its parent index, the Morningstar Developed Markets ex-North America Target Market Exposure Index. DIVI applies a screen to the trailing 12-month dividend yields, which can include applying sector, country, and turnover constraints. Overall, it’s designed to achieve higher dividend yields than its parent index.

DIVI has turned in solid performance to start the year, too, outperforming its ETF Database category average and its FactSet segment average on a YTD basis by 136 and 137 basis points, respectively. It also adds a 5.7% annual dividend yield on top of that.

Its foreign equities focus could also be a contributor as markets have taken a liking to foreign equities of late, which could be benefitting from an expensive and volatile U.S. equities market being less appealing than more affordable, dividend-offering foreign firms.

For more on an emerging markets-flavored dividend ETF, read more here.

Moving forward, with bank issues the latest source of uncertainty for U.S. advisors and investors, current income with limited exposure to a volatile U.S. market in a core dividend ETF like DIVI could be worth watching. With more income-focused strategies coming online from Franklin Templeton, income looks to remain a key theme in the months ahead, with DIVI riding a wave of advisor engagement momentum.

For more news, information, and analysis, visit the Volatility Resource Channel.

VettaFi is an independent publisher and takes responsibility for our edit staff, research, and postings. Franklin Templeton is not affiliated with VettaFi and was not involved in drafting this article. The opinions and forecasts expressed are solely those of VettaFi and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

TAXF – Tax Season Offers Reminder to Try Diversified Muni Bonds

Spring is just around the corner, and with it comes a much less exciting event — tax season. Still, advisors have to be aware of the best ways to mitigate the impact of the tax bill for clients, whether in the near term or looking ahead to the end of 2023 itself. That presents an opportunity to revisit diversified muni bonds in an ETF like the American Century Diversified Municipal Bond ETF (TAXF), which has performed well despite a volatile year so far.

Before getting into the benefits of muni bonds themselves, it’s important to note the value of the ETF wrapper in tax season compared to mutual funds. Mutual funds tend to incur more capital gains year over year, while the ETF wrapper limits those gains until the shares are sold.

That offers ETF shareholders more time to compound their gains before facing that tax bill, and with the transparency and active management offered in an ETF, managers can apply strategies like tax-loss harvesting to minimize distributions.

Combine that with diversified municipal bonds, and the ability to mitigate tax impacts grows. Muni strategies have performed well as they’ve bounced back from a tough 2022, with local governments flush with cash thanks to strong revenues and Federal government support. According to YCharts, muni national long and muni national intermediate term ETFs have returned 2% and 1.6% respectively on a YTD basis.

For more on muni ETFs, read: Bull vs. Bear: A Town Hall On Muni ETFs

Thanks to the tax free nature of most muni bonds on top of those returns, they make for a solid and stable investment amid such an uncertain U.S. market defined by an ongoing fight against inflation and a simmering banking crisis. TAXF, which actively invests in both investment-grade and high-yield municipal bonds, uses these tax-free or tax-limited and diversified municipal bonds in such a way that makes it appealing especially to higher earners.

TAXF charges 29 basis points for its exposures, and has outperformed its ETF Database Category Average and its Factset Segment Average on a YTD basis, outperforming the pair by 82 and 26 basis points respectively.

Advisors have options to consider right now in the ever-growing world of ETFs, but bonds have been a standout, and by looking to diversified muni bonds, they can offer clients tax mitigation strategies worth flagging. With strategies focused on income coming down the pipe that can also help buoy portfolios, now may be a good time to keep an eye on TAXF and how it performs in the weeks and months ahead.

For more news, information, and analysis, visit the Core Strategies Channel.

USFR – Siegel: Bank Crisis Equal to “One or Two Tightenings” by Fed

Amid the ongoing bank crisis, WisdomTree Investments hosted a webinar on Thursday titled “Navigating Market Headlines With Professor Siegel.” In the discussion, Professor Jeremy Siegel, senior investment strategy advisor for WisdomTree and emeritus professor of finance at the Wharton School, joined the firm’s head of fixed income strategy Kevin Flanagan and global CIO Jeremy Schwarz to discuss how the bank crisis has impacted the Fed’s approach to inflation.

Siegel described the bank crisis and its impact on the market as a “chill” equivalent to one or even two rate hikes from the Fed, with the tightening of conditions around lending substituting for a rate hike. That isn’t all bad news, he noted, adding that the important news from Federal Reserve chair Jerome Powell will be the forward guidance he will give rather than just announcing a zero or 25 basis point hike.

“This is, I think, the type of shock that Jay Powell and the Fed needs to realize that their tightening was one of the fastest in Fed history, and perhaps went too far,” Siegel said. “It would have been worse if they kept on hiking and hiking, and we had some big crisis in October with rates much higher. So in some sense, this is good news.”

Siegel noted that the chilling impact of the bank crisis and shock has made him more optimistic about 2024, even though the shock may result in lower GDP and perhaps lower earnings this year.

As for strategies for the moment, Flanagan brought up questions the shop has gotten about volatility and ways to play Treasury yields, with floating rate notes (FRNs) one route to consider. The WisdomTree Floating Rate Treasury Fund (USFR) invests in FRNs on a rolling basis, tracking a market value-weighted index of the securities, each with a two-year term. Charging 15 basis points, USFR has outperformed its ETF Database category average and FactSet segment average over the last three months.

“It’s like an ETF of a money market fund that pays these short-term high Treasury rates,” Siegel said of the strategy. “If you are worried about banks, I don’t think you have to be, but if you are worried about banks, these are Treasuries — U.S. Treasuries. So you’re getting a much higher interest rate on that.”

Siegel also touched on the debate surrounding quantitative tightening and the Fed’s decision to expand its balance sheet to support the banks, pointing out that the problem over the last week hasn’t necessarily been tightening, but instead the sharp inversion of the yield curve.

“There’s some talk about would they halt (quantitative tightening). You have to realize what they’re doing. They’re selling their Treasury bonds for the reserves,” Siegel said.

“Quantitative tightening really doesn’t have impact, unless they shrink that reserve base, which they blew up during the pandemic, to a level where they begin to impinge on the requirements that banks have for keeping those reserves. My understanding is that they’re nowhere near that at the present time,” he added.

The discussion surrounding the Fed is just the latest from Siegel, who has shared other thoughts on the fight against inflation in past webinar discussions. For those advisors looking for continued perspective on the topic, check out further commentary from Siegel here.

For more news, information, and analysis, visit the Modern Alpha Channel.

FLJH – Keep Japanese Equities ETF FLJH on Your Shortlist

Reopenings are a key theme this year, but not all economic restarts are created equal. Yes, China’s reopening and unwinding of its “zero-COVID” rules will have a significant impact on global markets. But rampant COVID deaths, political risk, and a lagging real estate sector have ensured that Chinese markets are no sure thing. That said, Japan’s reopening could be worth a look instead in a Japanese equities ETF like the Franklin FTSE Japan Hedged ETF (FLJH).

First off, investors shouldn’t underrate the importance of Japan’s own reopening. China’s gets more attention given how stringent its “zero-COVID” regime has been, but Japan’s reopening is starting to hit its stride. The archipelago nation is targeting a record number of inbound travelers in 2015 as part of an ambitious plan to reignite an industry that had aimed for 40 million tourists just before the pandemic.

At the same time, the Japanese government also unveiled a government stimulus plan late in 2022 that is set to support a broader rebound in wages that showed up more recently in economic data. While it is facing a recently more inflationary climate, at last one Japan expert believes that the inflation shows that the country is perhaps ending its affair with structural deflation.

While a weaker yen had seemed set to benefit the country’s exporters, a stronger yen could in turn support domestic consumption. Taken together, the situation in Japan merits a look at a Japanese equities ETF with solid returns, like FLJH. Tracking the FTSE Japan RIC Capped Hedged to USD Net Tax Index, the strategy hedges out currency exposure, which could be a key advantage as the currency’s short-term future appears a bit up in the air.

FLJH charges nine basis points and has outperformed its ETF Database category average and FactSet segment average YTD, returning 6.5% compared to 5.4% and 4.6%, respectively. The strategy just hit its five-year anniversary in December, and with international equities looking appealing right now compared to overvalued U.S. equities, a Japanese equities fund could be an ETF to keep on the shortlist in the weeks and months to come.

For more news, information, and analysis, visit the Volatility Resource Channel.

VettaFi is an independent publisher and takes responsibility for our edit staff, research, and postings. Franklin Templeton is not affiliated with VettaFi and was not involved in drafting this article. The opinions and forecasts expressed are solely those of VettaFi and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

ARKW – Prep for Super Bowl in Digital Consumer ETF ARKW

The Super Bowl has come around once again, at a time when tech stocks are trying their best to reignite after last year’s rough selloff. The timing may prompt investors to not only look to the Super Bowl’s crucial role for digital sports betting firms like DraftKings (DKNG) but also at the changing and growing world of digital consumers. As eyes turn towards the Super Bowl, market watchers may want to consider a digital consumer ETF like the ARK Next Generation Internet ETF (ARKW).

Sports betting has become increasingly legalized across the U.S. in recent years, a trend that could promise a record breaking $1.1 billion in total Super Bowl-related bets. That’s a significant opportunity for firms like DraftKings (DKNG) which could be poised to take advantage, with the nationally-recognized online betting hub weighted at 4.8% in ARKW. DKNG is up about 54% over the last month, meanwhile, as it looks to rebound from a tough 2022.

More broadly, online sports betting is just one piece of the ever-growing digital content landscape defined by short-form video and recommendation engines supplanting incumbent media and AI streamlining work and getting more eyes on digital entertainment. According to ARK Invest’s Big Ideas for 2023, online sports betting in the US and Canada is likely to grow 27% in real terms at an annual rate during the next five years, from ~$100 billion in 2022 to ~$330 billion in 2027.

Each of those factors in a growing market for online leisure presents an intriguing case for a digital consumer ETF like ARKW. The strategy is actively managed, investing in companies that are poised to profit from advances in cloud computing, e-commerce, big data, artificial intelligence, mobile technology, social platforms, and financial technology.

Charging 88 basis points, the ETF has returned 44.6% over the last month, outperforming its ETF Database Category Average and its Factset Segment Average with returns of 11.1% and 23% respectively. ARKW has also added $9 million in net inflows over the last month.

The world is consuming more content online than ever, and with the biggest event in the U.S. media market coming up this month, investors may want to watch a digital consumer ETF, too. ARKW represents a notable option for exposure to the space in the weeks and months ahead.

For more news, information, and analysis, visit the Disruptive Technology Channel.

BUYZ – Go Shopping with Disruptive Commerce ETF BUYZ

Rumors of a dip in holiday spending may have been greatly exaggerated — whereas some were concerned that inflation would have taken a bite out of holiday consumer spending last month, instead shoppers broke records with $211.7 billion in online buys. That, and recent indicators regarding consumer sentiment may add momentum in the new year for a disruptive commerce ETF like the Franklin Disruptive Commerce ETF (BUYZ).

December’s consumer spending marked a bump of 3.5% compared to consumer spending in December 2021, while the U.S. index of consumer sentiment reached 64.9 according to YCharts, up from 59.7 the month prior. Retail e-commerce revenue has increased from $458.8 billion in 2017 to $904.9 billion total last year, with an estimated total spend of $1.7 trillion by 2027 according to Statista.

While the Fed’s decisions regarding rate hikes and a “higher for longer” regime will have significant bearing on whether the economy will face a recession this year, some notable names are suggesting the U.S. economy could avoid a contraction. Megabank Goldman Sachs has itself claimed the U.S. will narrowly avoid a recession. The situation now looks more like a “soft landing” some in the markets had called for last year, instead.

Taken together, those factors could boost the case for a disruptive commerce ETF like BUYZ. The strategy is actively managed and charges just 50 basis points investing in companies poised to disrupt traditional commerce, like online marketplaces, electronic payments, and the sharing economy. Those companies include payment companies as well as logistics and delivery companies, combining a healthy weight to Amazon (AMZN) with other names like MercadoLibre (MELI).

BUYZ has outperformed its ETF Database Category Average and Factset Segment Average over the last three months, returning 12% compared to 7.5% and 4% respectively. The strategy is also approaching its three-year mark on February 25th next month, a key milestone for ETFs.

Much remains to be decided for the fate of the economy this year, but consumer spending ended 2022 strong and could keep some of that momentum in 2023. For investors eyeing consumer spending as an investment area to consider, BUYZ may be a strategy to consider.

For more news, information, and analysis, visit the Volatility Resource Channel.

VettaFi is an independent publisher and takes responsibility for our edit staff, research, and postings. Franklin Templeton is not affiliated with VettaFi and was not involved in drafting this article. The opinions and forecasts expressed are solely those of VettaFi and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

IRBA – Look to IRBA for a Profits-Driven ESG ETF

ESG has had a hard last few months, that much is true. It’s gotten politicized in a way that other aspects of the asset management world haven’t, but that doesn’t mean that ESG is going away. Finding an ESG strategy with solid returns is still an important part of advisors’ jobs in modern investing, and strong interest in ESG may merit taking a look at a profits-driven ESG ETF like the iMGP RBA Responsible Global Allocation ETF (IRBA).

Let’s look at ESG right now. As of last month, 81% of U.S.-based institutional investors were planning to increase their allocation to ESG products over the next two years according to a report from PwC — and 83% of their European peers said the same. Climate change and carbon emissions were listed as the top priority for U.S.-based institutional investors and money management firms with sustainability strategies.

Add in the much-vaunted “generational shift” in wealth management, in which younger generations are looking more for ESG than older cohorts, and it becomes apparent why advisors and investors are looking for the right ESG strategies. Still, not all ESG strategies have performed as well as they could have in the broad market selloff last year and in this rising rate environment, with some anticipating ESG strats generally to have some difficulties this year.

That’s why a profits-driven ESG ETF like IRBA can be a strategy to watch for advisors interested in ESG this year. The Richard Bernstein Advisors (RBA) strategies, which include IRBA as well as other ETFs and SMAs, focus on fundamentals with an emphasis on three key factors: profits, liquidity, and sentiment. The RBA approach analyzes corporate profits cycles to help guide its investments, going for defensive areas when profits drop and more cyclical options as profits rise.

The ETF, which is actively managed and charges 69 basis points, doesn’t look at specific stocks but rather uses ETFs to express the RBA investment committee’s views on the market. As a go anywhere ETF, expects to have an allocation of 65% to equities and 35% to fixed income — and crucially, IRBA only uses ESG ETFs.

Combine its emphasis on the profit cycle with its ESG approach and one can see the case for IRBA. The strategy outperformed the ETF Database Category Average and its Factset Segment Average over three months, returning 11.1%. For investors looking for an ESG strategy in such uncertain times, IRBA may be one to watch in the weeks and months ahead.

For more news, information, and analysis, visit the Richard Bernstein Advisors Channel.