The dual purpose of locking in elevated yields and remaining nimble when navigating the US Treasury yield curve make recently launched fixed maturity bond ETFs “super interesting”, according to Antoine Denis, head of advisory and investment solutions at Syz Group.
Speaking to ETF Stream, Denis said the monetary policy pathway remains a matter of when and not if central banks will cut interest rates this year – and by how much – and added policymakers have made a “good decision” in delaying rate cuts even while the disinflationary pathway remains broadly intact.
Despite a broadly constructive outlook, Denis said his team prefers quality allocations within government bonds and investment grade credit, especially while tight spreads in high yield mean investors are “not really paid off for risk-taking”.
However, he warned against the reinvestment risk inherent in parking large allocations in safe havens such as short-duration US Treasuries.
“Even if it is tempting to invest in one-year US Treasuries and enjoy the ride for this year, investors then face the hangover that when the rates are down, they will need to reinvest after missing the opportunity to lock in high yields,” Denis warned.
Instead, his team tries to be “nimble” with its positioning along the curve up to 10-year duration and while this might involve implementation through tools such as structured products, some ETFs remain attractive.
“Fixed maturity ETFs are super interesting, as we can point out where we want to be on the yield curve,” Denis said.
“From a private client perspective, this is good as some of them burned their wings in 2022 after investing in something defensive and still ending up underwater. With fixed maturity ETFs, we can have a discussion with a client and tell them what they are going to be paid.”
Equity views
Picking moments in equities In the equity bucket, Denis echoed the thoughts of many fund selectors in underlining “stretched” sentiment and “a lot of concentration” in US equities, a dilemma he said can be tackled through ETFs offering equal-weight S&P 500 exposure and others targeting quality sectors – healthcare – and those with strong cashflows – energy.
Elsewhere, his team has enjoyed a “nice ride” in Japan equities over the past year after the asset class spent a long period “under-loved, under-owned and under-valued”.
Denis said he implements Japan with a mixture of ETFs and active funds with some yen exposure, enabling them to benefit from a currency recovery if Japan moves away from its unorthodox monetary policy while also potentially benefitting from equity market strength if the yen continues to weaken.
A country exposure Syz has been reducing for “quite some time” is China, which Denis described as the “elephant in the room because it is undergoing a structural shift with its growth story cooling down”.
He argued the country faces headwinds including supply chain restructuring to India and Mexico, state purchases of domestic equities having limited impact and to-date insufficient support to resolve real estate sector woes.
ETF innovation
Finally, Denis said a story that is hard to miss is the noise surrounding recent bitcoin ETF approvals in the US.
“It is unprecedented in terms of traction from the market, especially in the winner[1]takes-all strategies by large franchises.
“ETFs are the highway for an asset class that was criticised. It is now becoming a more mainstream by coming through ETFs. I am quite excited about the next development in this space.”
This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To read the full edition, click here.
