PULS - Fund Flows Show Investors Still Favouring Fixed Income Despite Stock Rally

2023-08-11 05:28:00 ET

Summary

• Fund flows show investors still favouring fixed income.
• Money Market and high interest savings instruments proving popular.
• New buffer and accelerator ETFs also gaining investor interest.

Despite the recent run in stocks, fund flows show investors are still favouring fixed income. MoneyTalk’s Greg Bonnell discusses with Andres Rincon, Head of ETF Sales & Strategy at TD Securities.

Greg Bonnell: Equities have had a decent run so far this year, but is that performance leading investors to put more money to work in stocks? Here to discuss what he's seeing in the exchange-traded funds space is Andres Rincon, Head of ETF Sales and Strategy with TD Securities. Great to have you back on the program.

Andres Rincon: Thank you for having me, as always.

Greg Bonnell: So there has been a lot of talk, I feel like, over the summer months, with some of the pundits on Wall Street putting their toes back into stocks after the run that they've had. What's actually happening in terms of fund flows in ETFs?

Andres Rincon: You're right. We've seen the market have quite a bit of a rally, and it's been inching up over the last few months, really. And so a lot of analysts have now gotten on board with-- they are seeing, obviously, inflation slow down a little bit, and they're saying, well, it may be time to get into equities. However, on the flow side, we haven't seen that yet.

So if you look at it in the ETF space here in Canada, for example, call it $13 billion has gone into fixed income ETFs. Compare that to $7 billion in equity ETFs. And you might say, well, that's maybe the last few months, well, I'm talking about full-year numbers. But that gap is actually widening this year. So right now, we're at $5, $6 billion, and we continue to see that widening gap between flows in fixed income and equities.

Just in July, we saw $1.8 billion go into fixed-income ETFs. So it's a staggering number in terms of how much money is going in there. And I do think it's a shift in momentum in the direct-investing space-- it's also on the advisor space-- in that they see the yields that you can get in fixed income. And that's why it's so attractive right now, and a lot of money is going into that space.

Greg Bonnell: So as the funds flow in that direction, what kind of ETF products-- or if we're talking fixed income-- because now we can start to break it down across several different kinds of products-- what's actually seeing the most interest from investors?

Andres Rincon: It's actually quite broad. But there's two areas that have seen a lot of flows. Number one is cash-management ETFs, or you can also call them high-interest savings ETFs. Basically, these are just bank deposits offered through a fund company. And these are very, very popular, generally pay about 5%. And we're seeing a lot of flow there. Call it to the tune of $4.8 billion this year alone.

So a lot of money is going into these ETFs. And these ETFs are relatively low risk in that they hold just a deposit with some of the banks. On the other side of that, you have money-market ETFs. So these are ultra short-term products. And these, for example, have also been very popular. These are T-bills in a variety of money market securities that are in these funds, and they offer high yields in this environment.

So they're obviously very attractive to a lot of investors. And apart from those two, you get your traditional fixed-income investment, your aggregate bond, alternative credit, and a couple of different areas.

Greg Bonnell: When it comes to these high-interest savings accounts vehicles, or these money market funds, what do investors need to keep in mind? Because obviously, yield is attracting people into the space. What do they need to be mindful of? That yield isn't guaranteed forever, of course.

Andres Rincon: No, of course. If interest rates start going lower because inflation starts going lower, then, obviously, rates will go lower, and these ETFs will pay lower.

Greg Bonnell: OK. Let's talk about some other parts of the market. These are interesting ones that you put before us and I'm not very familiar with-- buffer and accelerator ETFs. What are these?

Andres Rincon: Yes. They've become very popular in the US and slowly, more in Canada. So in the US, you have a company called Innovators ETFs, which are, really, the leaders in this space. And in Canada, you had First Trust launch a couple of these. And now, BMO has filed to launch more of these here in Canada.

So it is a space that is quickly growing. And especially, it's very popular with the retirement community. And the reason they're popular is because they offer defined outcome exposure. So unlike many of your traditional funds where you have to go up and down with the market, they use options to construct portfolios so that they have defined outcome.

So they have a variety of different outcomes offered to clients. Some of them have limited protection. Some of them have full protection. Some of them have accelerated leverage that's -- so they call it accelerators, or they have buffers. And they can play around with the buffers and the leverage.

And what that ultimately gives you is exposure to the market but with a different outcome. So you might have, let's say, a 10% buffer on the downside, but you might be capped 15% higher. So if you hold this product for two years, let's say, you might have a certain upside with a limited downside. Or you might have full downside protection with limited upside participation.

In the accelerator case, you might have just a little bit more leverage but one-to-one downside. So they have many different ways to give you exposure or to give the investors exposure, and they've become a lot more popular with those investors that are close to retirement and are worried about their downside protection.

Greg Bonnell: When I hear your leverage, I think about a certain amount of caveats that come with that. What do we need to be aware of if people are taking a look at these products and they're thinking, well, some of them are leveraged products?

Andres Rincon: Yes. And with leverage, obviously, you have leverage to the upside and to the downside, sometimes. Most of these have downside leverage that is one-to-one. But at the end of the day, you have downside exposure with many of these products, especially on the accelerator side.

And on the buffer side, what's really important to remember-- and not to get into the weeds -- is that these are usually popular and bought at the time that they are launched, not one month or two months later, because they do move in value as the markets move. So if the markets move, and the market's up 10%, that buffer is 10% lower. So you do have downside in those scenarios.

So they are complicated products. They're not as easy to understand. But they've become very popular with some investors.

Greg Bonnell: Really interesting space maybe if you want to take a deeper look. I want to remind viewers that Andres actually has a show called Buyside Views where he speaks with the fund-industry executives about the trends that they're seeing. So the latest episode-- I think it came out yesterday-- it features East Coast Fund Management's Mike MacBain. And one of the topics he spoke about is why investors may not be as diversified as they think. Have a listen.

Mike MacBain: What happens there is that I don't have any interest-rate exposure prior to that, so I'm not correlated to interest-rate movements. And that creates a separate risk profile for me because almost every other asset that clients invest in or investors invest in today, because of the intervention from central banks, almost every other asset has been correlated to interest rates. So you think you've got a diversified 60/40 portfolio of equities and bonds, but, really, you don't. You've got a highly correlated portfolio. And that showed in spades in 2022.

Greg Bonnell: All right. So some interesting commentary there from Mike about this idea of the 60/40 portfolio and perhaps not as diversified as you think. Tell me a little bit more about the show, even Mike's show or even some of the other shows.

Andres Rincon: Yeah. So TD Buyside Views, we host a lot of our clients in this show and where they can actually bring their perspectives into what's happening in their world and their markets. And we were grateful to have Mike MacBain, CEO and CIO of East Coast Fund Management, in our show. And he had the chance to talk a little bit about alternative fixed income, how it fits in your portfolio, some of the risks, some of the benefits of that space, so I do encourage, obviously, the listeners to join us at TDSecurities.com, Spotify, Google, podcasts. And you can find us on Buyside Views at TD Securities.

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