00:00 Speaker A
So how can ETFs help you make money in this uneven environment or maybe insulate you? With me on set is Steve Laly, BlackRock’s Global Co-head of Bond ETFs for this week’s ETF report brought to you by Invesco QQQ. Good to see you, Steve. Thanks for being here.
00:14 Steve
Good to see you. Thanks for having me.
00:15 Speaker A
So, we are in this uncertain environment, both from an economic standpoint and from a what’s the Fed going to do next standpoint. So given that, how do you sort of attack your strategy?
00:27 Steve
Yeah, I I I think this this kind of reinforces um what we’ve been saying for a while, which is it’s a tremendous um environment to invest in fixed income.
00:36 Steve
So this latest um, you know, sort of hesitation um amongst, you know, Fed members about whether they will or won’t actually is an opportunity in our view because, you know, it allows you to still lock in these yields um because at some point, they probably will resume cutting. I mean, the market’s still pricing in that, you know, a solid three to four cuts over the next year, right? So, you know, for us, we think it’s a great time just to keep locking in those yields and
00:52 Speaker A
Gotcha.
00:53 Steve
Yeah, credit spreads are are a little bit tight, but you know, you it doesn’t take much to be able to really get good income, you know, locked in over the next few years, right? You don’t have to go that far out on the curve as an example.
01:04 Speaker A
And and does it really matter if the Fed cuts in December or in January? I mean, except I guess for the idea of timing of trying to lock in those yields.
01:11 Steve
Yeah, I mean, so this gets to the, you know, the idea of the market itself. It in theory, it’s all priced, right? But but there’s a little bit the uncertainty does give you a little bit of room, you know, where, you know, maybe they don’t cut and then there are more cuts later or something like that. So it’s the path that kind of matters. I think most investors are settled on the idea that there will be more, but it just gives you a chance to be able to move, you know, out of that very, very front end and and lock in something a bit longer because it is, you know, if you think back, you go back, you know, five years, right? We didn’t have this. So it’s it’s, you know, it’s the first time you put income back into fixed income and you know, we’ve been saying that for a while understandably, but it’s just a great opportunity while we’re at these levels.
01:43 Speaker A
Okay, so let’s talk about that shift a little bit because we have seen, you know, retail investors certainly but institutions as well pouring into things like money markets, right? Because they were yielding something meaningful for the first time in a long time and they’re also very liquid. But now, what should that, how should you be shifting? How exactly should people be going about doing this?
02:02 Steve
Yeah, and there are ways to do this. and obviously, um, you know, we’ve talked about, you know, investor’s risk appetites, right? So for example, Escove is a good way to kind of start moving out of SGOV. SGOV moving out of, you know, time deposits or CDs. Um, you know, you’re you’re still getting close to a 4%, right? And and then that’s our zero to three month te fund. Um, but then you can go further out, right, into something like near NEAR, which is which is still short duration, but the duration expands out a couple years. And then you can go out further into something like Bink BNC, which is um our CIO Rick Rieder’s fund, which is an income focused fund but but it’s actively managed. So it’s trying to monitor the duration and credit risk etc. But you know, it depends on your risk spectrum. Investors will start moving out a little bit, you know, into shorter maturities and then, you know, gradually, um we we would even say, you know, for a while, we were I think very, very cautious on the long end, but you are starting to see a slowdown in the labor market. Right. If that picks up, you probably do want to own something further out on the curve, right? Longer maturities.
02:59 Speaker A
And how do people need to be thinking about this in balance with their equity holdings, especially with all of these questions out there about whether the equity market’s getting toppy.
03:07 Steve
Yeah, and that’s something that’s been hotly debated, right? Since the tightening cycle, which um for a while, the correlations were such that fixed income really wasn’t offsetting, you know, equity moves. And it’s interesting because if you go back in time and we looked at this, you can go back, you know, mid last century and it’s been all over the place. and a lot of times it was positively correlated, negatively correlated, but I think, you know, now, um you probably will see the long and fall if if labor markets slow sharply. Right? And so it’s something, you know, further out on the curve like an IEF or even, you know, TLT has been, you know, a huge um flow for us, you know, over a number of years. Escove kind of took that crown this year with 30 billion. but, um, you know, it makes sense to kind of spread your bets a little bit.
03:44 Speaker A
And then just writ large, do you think that investors are adequately, um, you know, allocated to fixed income right now given the gains we’ve seen in equities and the and the money that’s poured in there.
03:54 Steve
No, I think we we still think investors are are underinvested in fixed income. So, you know, you still have, you know, depending on your metric, I think 7 trillion maybe even, you know, closer to nine in in money market funds. Um you probably do need more balance in your portfolio, right? You need more income in your portfolio. So, you know, even something like I bonds, right? A great way, you know, some people are not comfortable with, you know, sort of the perpetual nature of a bond fund. Something like an I bond where you do have a fund that matures, right? That’s kind of an in between step where you can lock in a yield, let it roll down the curve like you would a normal bond, right? That’s a good way to sort of still add income and balance to the portfolio. Um, you know, we’ve seen, you know, 70 billion flows into that category. We’ve seen, you know, overall this year globally, we’ve seen like 150 billion going to fixed income. It’s still, I think investors are still under invested in fixed income relative to the opportunity.
04:32 Speaker A
A lot of room to go. All right, Steve, thanks for coming in. It’s great to see you. I appreciate it.
04:36 Steve
Thanks for having me. Yeah, you too. Thanks.