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March 31, 2022, 3:27 p.m. EDT

Why high-yield ETF outflows made this Jefferies strategist ‘a little nervous’

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By Christine Idzelis

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With the Fed kicking off its rate-hike cycle this month, investors have been concerned that rising interest rates will hurt the value of their bond holdings.

The latest research paper from FlexShares ETFs, managed by Northern Trust, says that “bonds with shorter durations are often less sensitive to rising interest rates” but tend to have lower yields. That’s why some investors might consider taking additional risk in high-yield debt, according to FlexShares, whose research shows “historically the high-yield segment of the fixed-income markets has performed well during periods of rising interest rates.”

FlexShares said in the paper that “high-yield bonds had an average one-year return of 4.3% during the past four Fed rate hiking episodes, versus an average one-year return of 2.0% for investment grade bonds.” Within equities, FlexShares wrote that “factors such as value, quality, and dividend yield look attractive in rising rate environments.”

Investors worried about rising rates hurting their portfolios might also want to consider the Simplify Interest Rate Hedge ETF /zigman2/quotes/226701477/composite PFIX +3.42% , according to Bassman. Shares of the ETF have risen about 33% so far this year, FactSet data show.

John Madziyire, a senior portfolio manager and head of U.S. Treasuries and inflation within Vanguard Group’s fixed income group, said by phone that “short duration products” are “the best place” for investors as interest rates rise. When yields go up, “you actually don’t want too much duration risk,” Madziyire said. Investors seem aware of this, as Vanguard is seeing an uptick in inflows into shorter duration funds such as the Ultra-Short Bond ETF /zigman2/quotes/225913398/composite VUSB -0.01% , he said.

As for the best and worst performing ETFs this past week, two funds at Cathie Wood’s ARK Investment Management ranked among the top five. But last week’s top performer, United States Oil Fund LP, fell to the bottom, according to FactSet data through Wednesday.

The good…

Best Performers %Performance
ProShares Bitcoin Strategy ETF /zigman2/quotes/230440344/composite BITO 13.1
ETFMG Alternative Harvest ETF /zigman2/quotes/204332491/composite MJ 11.3
ARK Innovation ETF /zigman2/quotes/204808965/composite ARKK 8.7
ARK Next Generation Internet ETF /zigman2/quotes/201846852/composite ARKW 8.3
KraneShares Global Carbon Strategy ETF /zigman2/quotes/219806069/composite KRBN 7.9
Source: FactSet, through Wednesday, March 30, excluding ETNs and leveraged products. Includes NYSE, Nasdaq and Cboe traded ETFs of $500 million or greater

The bad…

Worst performers %Performance
United States Oil Fund LP /zigman2/quotes/203483736/composite USO -7.1
iShares S&P GSCI Commodity-Indexed Trust /zigman2/quotes/204499413/composite GSG -5.9
iShares GSCI Commodity Dynamic Roll Strategy ETF /zigman2/quotes/208581139/composite COMT -5.4
Invesco DB Oil Fund /zigman2/quotes/202740135/composite DBO -4.9
Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF /zigman2/quotes/207481984/composite PDBC -4.3
Source: FactSet data

New ETFs

In ETF launches this week, Columbia Threadneedle Investments said Wednesday that it is offering the Columbia Seligman Semiconductor and Technology ETF (SEMI), an actively managed fund that will primarily invest in “securities of semiconductor, semiconductor equipment and related technology companies.” 

Also on Wednesday, Volatility Shares announced that it was launching the  2x Long VIX Futures ETF /zigman2/quotes/234313102/composite UVIX +1.53% and the -1x Short VIX Futures ETF /zigman2/quotes/234313010/composite SVIX -0.72% , with Milliman Financial Risk Management serving as “commodity sub-adviser.”

“We’re excited to bring back the VIX futures exposure that investors have been missing since 2018,” said Stuart Barton, co-founder of Volatility Shares, in the announcement.

Check out: A bet on stock-market volatility might saddle investors with hundreds of millions in losses, as Barclays makes a big change to funds

ETF reads this week

Morgan Stanley to Launch ETF Platform This Year (Barron’s)

Grayscale’s Fight for a Bitcoin ETF Could End in Lawsuit Against SEC (Bloomberg)

Defiance CEO Looks to Set Her Disruptive Tech ETF Apart From Cathie Wood’s ARK (Bloomberg)

China ETF investors endure ‘dark’ month as macro factors take over (Financial Times)

Many Fund Managers Aren’t Offering Their Best Active Strategies in ETFs. Here’s Why. (Barron’s)

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