ETF TV News #90 Michael John Lytle, CEO, Tabula Investment Management discusses how and why investors are using fixed income ETFs today on ETF TV

Presented by Syntax Advisers.

Margareta Hricova: Welcome to ETF TV – your insight into the world of exchange traded funds issuers and investment. I am Margareta Hricova and joining me today is Deborah Fuhr and Michael John Lytle, CEO of Tabula Investment Management.

Welcome to the show.

Michael John Lytle: Thank you for having me.

Deborah Fuhr: Thank you.

Margareta Hricova: So, M.J., is now a good time to be invested in fixed income ETFs?

Michael John Lytle: Well, I’m slightly biased. I’ve been focused on fixed income for 30 years, having spent 18 years at Morgan Stanley, obviously setting up source and working with PIMCO and now setting up Tabula. I think there’s always a good time for investing in fixed income because it’s such a complicated asset class.

A lot of people refer to fixed income as though it’s one thing, but actually it’s a whole series of sub-asset classes that are very different from each other; so we have government bonds, we have emerging markets, we have investment grade debt, high yield. There’s always a different way of capturing returns in the market and delivering them to clients. So it’s not a question of when is a good or a bad time for fixed income. It’s really a question of rotation around the asset class to capture value.

Deborah Fuhr: What type of investors are using fixed income ETFs and how are they using them today, based on what you’ve said?

Michael John Lytle: The natural preserve for fixed income ETFs are multi-asset investors. It’s difficult even for a fixed income specialist to fully understand the space. And so for multi-asset investors, it’s a real challenge to get all the exposures that they need to various fixed income sub-asset classes. So it is clear that they have driven the space. Having said that, I think the fixed income ETF space has been growing very rapidly over the last few years and we’re now starting to see some pure play, fixed income investors using ETFs as trading tools, as medium term investment tools, allowing them to gain market exposure quickly while they work on building their own portfolio and individual bonds.

Margareta Hricova: Last week you listed an Asia ex-Japan, high yield ETF with an ESG filter. Are there many high yield bonds in Asia?

Michael John Lytle: So I think for most people it’s surprising how developed the credit markets are in Asia. So Asian credit is at about a trillion dollars. Asian high yield in US dollars is about 300 billion. If you look at high yield in Europe and the US, you have average durations that range between four and six years and yields in 3-4%.

Asia, on the other hand, has a yield at about 9% at the moment and a duration of 2.7. So that means that the yield per unit of duration is multiples in Asia of what you’re getting in US and Europe, and if you look at default rates, they’re actually inside of where the US default rates are at the moment. Those bonds, even the dollar bonds, are mainly traded in Asia. And so you need a deep understanding of the domestic markets to be able to harness the value in this space.

Deborah Fuhr: We’ve seen this year that ESG investing has been very popular, especially within the equity exposures. Do you see this trend expanding to fixed income?

Michael John Lytle: It’s totally unavoidable, actually. I mean, this move towards ESG is quite interesting. Obviously, the implementation of fx climate strategies is different in equity and fixed income. Just as an investor on the equity space, you’re owning shares, you’re voting, you’re having a long-term relationship with the firm. In the case of the bond space, you’re lending money and you’re lending it on certain terms, but for a specific duration. And so when that matures, you’re then being asked for money again. So you have very specific times when you can be very clear with a company as to whether you’re now willing to give them more money.

Companies obviously have maturity profiles, so every time their bonds mature, they need to raise more and so they can’t kind of fob off the market. They have to deal with the current attitude of investors. So I think ESG is very interesting in the fixed income space as an investor and from a broad ETF perspective, it’s clearly becoming more and more of a focus. I talk to people in the US and in Asia where ESG exists, but it’s not sort of front and center. Here in Europe, I would say ESG is much more front and center for all asset classes, particularly, I think from north to south. So the Nordics are the most focused, along with the Dutch and the Germans, the Swiss. And then as you go further south, maybe a little bit more waning. But what people are demanding from their equity investments, they’re also demanding from their fixed income investments.

Deborah Fuhr: How about if you think about government, right. Because that’s something you don’t really think about when you think about equities. How do you think about government bonds when it comes to ESG?

Michael John Lytle: That’s a very thorny issue. If you’re going to invest or not invest in a country based on the actions of the country, that’s something you can do, obviously, in a broadly diversified government basket. If, on the other hand, you have quite a focused basket, whether a lot of people buy individual governments, so they buy China bonds, government bonds or policy bonds and they really don’t have a choice from an ESG perspective. It’s not like the government has ways of nuancing your exposure, so you’re either buying into the overall activities of the Chinese government or not.

There is a move specifically in Europe where some governments have started to issue green bonds for specific projects. So that potentially allows you to focus your investing on the climate aspect of what the country is doing, but, of course, it doesn’t address the overall activities of a government. So I think it’s a very complicated thing to try and implement ESG policies through government bonds.

Margareta Hricova: And what are your thoughts on the state of ETF industry today and your outlook for 2022?

Michael John Lytle: Well, you know, as Deborah has been highlighting for 15 years, the ETF industry goes from strength to strength. It basically takes best practices around transparency and liquidity and then implements it in asset classes that are challenging. Sometimes it’s because the underlying asset classes are not quite as liquid as we would like. Sometimes it is because the strategies are more complicated. Implementing FTSE 100 in an ETF is very straightforward. Implementing an active strategy is more complicated. But you know, what the industry has proved is that it continues to adapt and change to meet the needs of investors.

Deborah Fuhr: It’s great. Thank you for joining us MJ.

Michael John Lytle: My pleasure. Thanks for having me.

Margareta Hricova: Debbie, can you tell us about some of the other news in the ETF industry?

Deborah Fuhr: Last week we saw 27 new listings and 15 new cross listings. The interesting news is that we have the asset inflow data for the end of August. The ETF industry globally has set a new record of 9.73 trillion, which is pretty amazing. The net inflows year to date are 834 billion. If we compare that to the prior record through the end of August, it would have been in 2017 when it was 433 billion. It’s interesting that the net inflows at 834 are already 344 billion greater than all of last year when we saw 762 billion of net inflows.

When we look at the past 12 months, the ETF industry has captured 1.78 trillion dollars in net inflows, which is pretty amazing. And the assets overall year-to-date have increased 21.8%, so we’ve gone from 7.99 trillion at the end of 2020 to 9.73 trillion.

We’ve had 27 months of consecutive net inflows. The majority of new investments are going into equities, a little bit into fixed income, very little into commodities, active ETFs are doing pretty well, but off of a small base, because they only capture 4.3% of overall assets.

And if you haven’t already registered to join us, do join us for our ETFGI Global ETFs INSIGHT Summit. You can go to our website, to register. Hope to see you then and see you next week.

Margareta Hricova: Thanks for another great update and thank you to our sponsor, Syntax Advisors, to Michael John Lytle, and of course to all of you for watching.

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Published on September 21, 2021