On this week’s episode of ETF Prime, host Nate Geraci was joined by VettaFi Head of Research Todd Rosenbluth to discuss polling results from VettaFi’s Fixed Income Symposium. Afterward, Richard Kerr, Partner at K&L Gates, brought a legal analysis to multi-share class structure filings. Matthew Sigel, Head of Digital Assets Research at VanEck, then talked about the upcoming SEC decision on spot ether.
Rate Expectations
To begin, Geraci discussed how speculation over rate cuts from the Federal Reserve has weighted on fixed income investors. Rosenbluth noted that VettaFi polled attendees from the April Fixed Income Symposium on their expectations for rate cuts this year. About 70% of the audience predicted one to two rate cuts. Meanwhile, over 25% of attendees expected no rate cuts to occur this year. In fact, Rosenbluth added that one of the panelists expressed belief that rate hikes could occur if inflation continued to stick longer than expected.
Duration Discussion
Moving on, Geraci expressed interest in learning about how bond investors currently view risk exposure. Rosenbluth responded by explaining that VettaFi polled attendees on duration exposure. Using the Bloomberg Aggregate Bond Index as a benchmark, advisors were asked how their average client portfolio was positioned. 42% of respondents said that clients were taking on less duration, while 26% were taking on more duration and 32% remained neutral.
“I think advisors and investors are hesitant to take on too much risk, given the uncertainty. They’re positioned a little bit less or less than the AG,” noted Rosenbluth.
Taking on Credit Risk
Geraci then asked Rosenbluth how attendees viewed credit risk within fixed income. Rosenbluth noted that while VettaFi often sees investment-grade corporate options as the most popular choice, the new polling found high-yield corporates have taken the throne. While 31% of the audience still preferred IG corporate bonds, 32% rallied behind high yield corporates. “High yield is certainly gaining favorable sentiment from advisors relative to where we were in the beginning of the year,” Rosenbluth added.
Looking at fund flows, Geraci observed that while investors seem to be confident in the economic outlook, the flows “haven’t exactly matched that sentiment.” However, Rosenbluth notes that shorter high-yield ETFs like the iShares 0-5 Year High Yield Corporate Bond ETF (SHYG) and SPDR Bloomberg Short Term High Yield Bond ETF (SJNK) have remained popular investment options. Geraci noted that these findings showed that while investors are not willing to take on duration risk, credit risk remains on the table.
Active Options
Rosenbluth added that the data indicates momentum is mounting behind active fixed income ETFs. He noted that 28% of the symposium audience had over half of their portfolio positioned towards fixed income in active ETFs. Rosenbluth observed that about 40% of the year-to-date overall flows to fixed income ETFs has some from actively managed funds.
“It’s not just sentiment, it’s not just a subset of that that we have at VettaFi. The flows are resonating as well, that active ETFs, through fixed income vehicles, is here to stay,” Rosenbluth noted.
The next guest to join Geraci was Richard Kerr, Partner at K&L Gates. Geraci asked Kerr to provide a legal perspective on the filings for multi-share class structures. Kerr observed that the SEC will eventually become more comfortable with the share class structure “in some way, shape or form.” While there were currently about 10 applications from asset managers for the share class structure, Kerr expected more applications to be submitted in the coming months. Highlighting the benefits the ETF share class can bring to mutual funds, Kerr added that there “is a clear desire of the industry to move this forward and make use of a ETF share class in traditional mutual funds.”
Waiting For Spot Ether
To close out this week’s podcast, Geraci was joined by Matthew Sigel, Head of Digital Assets Research at VanEck. Noting that VanEck currently has a proposed filing for an Ethereum spot ETF, Geraci asked Sigel about his level of optimism. Sigel observed that there has been a lack of engagement and momentum to from the SEC to get spot ether products prepared ahead of the May 23rd deadline.
Acknowledging his pessimism at the moment, Sigel listed a number of reasons why the SEC could disapprove of the product. According to Sigel, the correlation between Ethereum spot and Ethereum futures is nearly 99.8%. That’s similar to what the SEC green lit for spot Bitcoin ETFs. Sigel speculated that the SEC could argue that Ethereum is a security. On the other hand, it may disapprove of the liquidity of the Ethereum futures market. “Heading into the election, perhaps the administration’s call there is that nobody cares. So why not just stall until another lawsuit forces the issue,” Sigel added.
Listen to the entire episode of ETF Prime, featuring Todd Rosenbluth, Richard Kerr, and Matthew Sigel:
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