ETF ‘s and Opportunities in Fixed Income with Matt Montemurro

August 4, 2023No Comments

Keith Richards:

Hello and welcome once again to the Smart Money Dumb Money Show. I’m your host as usual, Keith Richards. I’m a technical analyst, as you know, and I am president and chief portfolio manager at ValueTrend Wealth Management. And we usually talk about equities on this show, but today I have a bit of a treat for you because we have a person who is in the opposite sphere of what I am familiar with, which is the fixed-income world. And I’m pleased to welcome Matt Montemurro, and I hope I’ve said your name right, Matt? I’m just gonna read his bio, so you’ll see me looking down. Matt’s a, an MBA and a CFFA. The smartest guy in the room, that’s this guy. He’s the lead portfolio manager for the fixed-income products at BMO.

If you know anything about BMO ETFs and funds, they’ve got a pretty wide range of these products. So Matt’s been there, done that. He’s, he’s got a fairly good background in the whole realm of fixed income, but he’s pretty adept in high yield. And another subject I am actually a little bit interested in, we’ll pick his brain on his emerging markets debt, that kind of thing because as a technical guy, I’m noticing the possibility of the beginning of a breakout on the emerging markets bond ETFs that I’ve been following. Anyways, we’ll pick his brain and see if we can gain some smarts from Matt today on fixed income. So, Matt, welcome to the show.

Matt Montemurro:

Thanks for having me, Keith. Looking forward to chatting today.

Keith Richards:

Yeah, well, so again Matt, we had a quick chat before we started the show, and I mentioned that a lot of my audience is very familiar with equities maybe not as familiar with fixed income. So why don’t you give us the landscape for fixed income today and where you may see opportunities and why any investors should be, should be looking at fixed income? So give us the big picture.

Matt Montemurro:

Yeah, absolutely, Keith. So, you know, looking back a little bit, you know, you look at 2022 and it was a disastrous deal for all asset classes, and we had, it was only the third time, in 150 years that we saw calendar year negative returns for both bonds and equities. So, you know, I think a lot of people struggled last year, fixed income was supposed to provide stability in portfolios, and last year was a little bit of an anomaly, and it did not do that. And everything kind of went down on the investor side. You know, I think it was a very unique market where we saw rates in Canada go from 25 basis points to 450. They continued to go up to 5%. Now as we sit here and I think as we turned into 2023, and as we look forward for the rest of this year, I do continue to see a lot of opportunity in fixed income.

And people say, oh, well, you know, why do you see that? Well, we had, you know, such negative returns. So I think now we have an opportunity ahead to take advantage of what fixed income traditionally was providing investors with both income and stability. And if you look back again to 2009, because we’ve seen this kind of historically low-interest rate environment, a lot of investors have been forced to move out of the credit curve. So taking longer duration risk, more interest rate sensitivity and down the credit curve to adding them, like you mentioned, high yield. Just to make the basic income needs that a lot of investors require from that fixed income allocation. Well, the paradigm has shifted. We’re looking at overnight rates at 5%, and that provides a lot of opportunity for investors. And it’s a new world.

It’s a place we haven’t been. We haven’t seen rates this high in the short end since the early 2000s. So when I look forward, I see opportunity in that way. So when I look at the market as well, from a high level, what we also have seen is the persistent inversion of the yield curve. So we’re seeing shorter-term rates higher than longer-term rates. And this is persisted. Now, this is the longest inversion of the US yield curve, I think on record. And I, it’s not going away anytime soon. So what that tells me is how do we take advantage of that? How do we take advantage of these shorter term yields, right there around that five, five and half percent. And then also protect ourselves in the long end. So, you know, when I look at opportunity where I see fixed income going right now, I think short-term credit is something that is valued extremely well.

I think you, if you look at asset manager flows, everybody is pouring into short-term fixed income. And you know, I think it’s, it’s, it’s that risk-return tradeoff that you, that you see it’s, you know, 5%, five and a half percent yield and you’re getting a half a year, maybe a year duration. You know, that risk-reward, that risk to volatility is extremely attractive in the market and something that’s unique that we haven’t seen in a very long time. So, you know, I like the short end of the curve. I think there’s tons of opportunity for the next year ahead in the short end because I do believe that we’re gonna be in a higher-rate environment for longer. I think, inflation, although we’ve made some meaningful strides, we just saw, June’s print be under 3% for the first time since 2021, I still think that core inflation’s gonna be sticky and that the Bank of Canada and the Fed are gonna hold those rates higher for longer.

They’re not gonna take any chances on lowering rates too soon. So for me, that means investors stick to the short end. Clip that high coupon while you can lock in those higher rates. I think that’s an extremely attractive trade right now from an overall yield curve perspective, if you wanted me to go into a little bit more on credit I see a lot of value in investment-grade credit. I’m bullish on investment-grade credit, but I’m not so bullish on high yield. So I like investment grade over high yield. So reason being on high yield, I think there are a lot of headwinds to come. So we saw record issuance after March 2020 of new high-yield debt. You know, those, that debt was issued at three to 5% coupons, you know, three to 5% interest rates, you know, they’re gonna have to refinance in the next about six to 18 months.

They’re gonna have to refinance at 11, 12%. That’s gonna put a lot of stress on business models. That’s gonna put a lot of stress on high-yield issuers. If you look at the high-yield market as a whole, in general, on average, historically the percentage of the high-yield market that would be deemed distressed. So OAS spread the option over a thousand is how they define distressed. You know, generally, you’re around five to 7%. Right now we’re sitting around 13%. So that tells me there’s, there’s gonna be some cleansing to be had. And the second part of that, that distress rate is that default rates haven’t ticked up. They started to go up a little bit higher, but we’re still at just over 2% versus historical averages of about three to three and a half.

So what I think is gonna happen over the next 12 months is that we’re gonna start to see a little bit of cleansing some of those distressed companies they’re gonna go under. But I, again, think that’s normal. I don’t think it’s a contagion event. I think it’s normal for some of these lower-end companies to default, well, maybe we see default rates go to five to 6%. That’s my view for the end of 2024. So right now I look at it and say, high yield, lots of risk ahead. I’m concerned about it. Investors used to use high yield to enhance yield or get the income needs. They require in a portfolio, they can get that from investment grade, and they can get almost 6% yield in short-term investment grade credit. It’s, you know, for me that’s a winning trade. I like the short end of the curve. I like credit specifically investment grade, and I think both Canada and the US are very well positioned from an overall, you know corporate perspective. So that’s where I’d be looking at seeing the most value in, in the kind of the next 12 months in the fixed income market.

Keith Richards:

Okay. So good. Yeah, and that’s because you took the question right out of my mouth cuz I was going to ask you about the high-yield stuff and yeah, the spread is huge. So I wanted to touch base on, actually, just before I get to that, I have to put on my technical hat for a second. And just leading into your thoughts about short-term rates being so high. It’s an inverted curve, which isn’t always wonderful for equities down the line, but we’ll see. Yeah. whatever the case that also competes with equities, of course. You know, why when you can get a risk-free rate of five, why would you? Try to get seven on stocks or something, you know, unless you think AI is gonna keep making, you know, 20% a year for the rest of your life you know, then I’ve got some swamp land in Florida to sell you.

But anyways technically the long bond and I want your comments on this. So there’s the, the, there, there’d been very long-term trend lines since going back to the, you know, before the early 2000’s where you could, you know, I literally was drawing for many years this long-term trend line, peak-trough, very, very neat and tidy, broke down as we know the past couple of years fell like a brick. And now it seems to be basing, but it’s way below that old trend line. But now the market’s in this kind of, you know, if you look at the TLT, like the, the 20-year or whatever or the 30-year, it looks like this, right? It’s going like sideways. Often when as a technical guy, when this kind of stuff happens, when you see a base, you often, that that usually means the end of the bad times. It doesn’t necessarily mean good times coming, but it does mean, okay, the poops hit the fan. We’ve seen the damage and now it’s trying to build some sort of a base. What is your perspective on the longer end of the curve? I’m talking about US strategies, but you could translate it into Canadian, you know, what is your perspective on the potential for capital gain upside, in other words, a breakout by the bond prices going forward? Is there, do you have any thoughts on that? I mean, inflation being what it is, and I agree with you a hundred percent by the way on that.

Matt Montemurro:

Yeah, no, I think there, there’s opportunity and long duration. I think it’s, it’s a timing thing if anything. As you know, I think we’ve been talking about it with clients since last summer. And what we’ve seen is, you know, I think there was a big ad duration trade at the end of last year at the beginning of this year. And I think that started to temper a little bit in terms of what we’ve seen recently. And, part of that is I think that higher rates for longer there’s optimism in the market that we’re gonna see rate cuts. And that’s kind of the main area where you’re gonna see big value in that long treasury, long federal bond exposure is when, you know, the, the Fed or, or Bank of Canada is forced to cut rates.

That’s where you’re gonna really see that upward appreciation from a price perspective. So I definitely see value in the long end. I think right now, while you’re seeing that kind of base like you were saying, I think the market is kind of putting in a cap on long-term rates by saying, okay, well, we don’t think that basically the entire curve, we don’t think that the long end is just gonna swing up, so we think there’s gonna be some sort of yield curve normalization. So, you know, we don’t know necessarily when that’s going to be, but I think right now, I would say I think adding long-duration exposure to the portfolio over the next 18 to 24 months, I think it will be a positive contributor to performance. I think it might be a little bit early. I think I would put it now as a defensive mechanism rather than necessarily a capital gain.

But more so as a volatility offset that if we see higher rates and we see equity markets kind of pull back that long duration exposure is what’s gonna be risk off. People are gonna be buying treasuries, especially in the long end, and that’s gonna be that, that ballast in your portfolio. but what I would say is, I think in the next six months we’ll start to get a little bit more of a clearer picture as to what the expectation of the Fed and Bank of Canada is in terms of cutting rates. And I think that’s when that move, when we get a little bit more clarity, that’s when we start to see maybe the breakout in the long end, because that’s where you say, okay, I think the market’s always been very optimistic about rate cuts. And now we keep hearing the narrative, you know, expect rates, higher rates for longer, expect higher rates for longer. So I think it’s starting to creep its way in. So I do think there’s opportunity in long duration? I might be worried today that it might be a little soon to put that trade on. But I do think that, in the next six months, I think we could start to see the environment where, 2024 I think could be a very, very attractive market for long bonds.

Keith Richards:

Yeah, I mean, I, again, you know, technical people, we wait for a base breakout. We don’t buy in the base, but it’s, it’s kind of setting up. So it’s interesting. I was going to ask you in, you know, one of the things we agreed that we would talk about my viewers know that I always talk to the guest beforehand to find out what we should be talking about. Cuz you’re the expert, not me in this area, but we were gonna talk about buying direct bonds versus buying ETFs that hold bonds. And I think what can tie into that if you don’t mind tying it in, is the, the question I have about the emerging markets bond, because obviously, you know, go out and buy some, you know, Mexican bond or something, maybe <laugh> maybe isn’t a great idea by itself, but in a, in a platform like an ETF might, might make sense. So maybe you can comment on why and where one would buy an ETF for bonds and also tie it into the emerging markets.

Matt Montemurro:

Yeah, sure. So yeah, we you know, we’re seeing a proliferation of the usage of ETFs. You know, there are hundreds of ETFs now, or actually thousands of ETFs now in Canada. So there’s no shortage of things to choose from. And I think that’s what one of them, that’s a challenge in finding the right ETF but also it’s the benefit of the ETF because it allows you to pick and choose the specific part of the market that you want to get exposure to. So traditionally, I think it’s always been a challenge for investors to run a bond portfolio. You know, if you’re a do -it yourself investor, if you’re an advisor you’re working with, either you’re discount brokerage or your retail bond desk, and basically it’s based on the inventory that they have available on a given day. So, you know, buying a Bell Canada 28 bond today, you come back a month and a half later to rebalance, that may not be available to buy or sell.

So now you have to buy another bond. May now, now you have to buy a Rogers bond, or you got, now you have to go into the energy space. So you’re, you’re kind of just, you’re not necessarily building the portfolio that you want, you’re building the portfolio that may or may not be available based on the, the discount brokerage or the, or the retail balance sheet at the time. So what ETFs have allowed investors to do is, is it given more choice. It’s given institutional tools to do yourself investors and advisors to basically say, you know what? I want Canadian corporate, or I want short-term Canadian corporate bond exposure. Well, I can buy an ETF that does that, that diversifies away any idiosyncratic risk, and I could do it in a quick and efficient way in a single trade a month later, I want to add to that position, or I wanna take away that position again, single trade, I don’t have to worry about dealing with the bond desk if there’s inventory, you know, where the prices.

So we are seeing a huge uptick in the use of ETFs for those specific reasons. And tying it into that, EM, one of the biggest, and this is both institutionally and from an advisor or do-it-yourself investors, is the usage of ETFs for non, let’s call it core asset classes. So let’s say high yield emerging markets you know, maybe it’s tips, so inflation protected securities where you may say, look, I think high yield or emerging market debt, it has great diversification benefits, it’s got a premium yield cause it’s yielding 8% or 9% or 10%, but do I want to pick Mexico or do I want to pick Brazil? Or how do, and by using ETF A, it gives you exposure to it in a single trade. So you can diversify away some of that, that individual either country or company exposure.

but b it also gives you access to these emerging market bonds that if you tried to go to, you know, for us it’d be BMO investor line and tried to go up by a Mexican local currency bond, maybe it’s available, but if it’s not, you’re probably waiting on the, on the bond trading desk line for, for 15, 20 minutes trying to get a price on the bonus and, you know, it’s, it’s not gonna be the most smooth experience. And at the end of the day, what are you actually getting? So I just wanna show, show a screen here in terms of, you know, I was talking a lot about the allocation. It’s beneficial because it’s transparent, and it’s easy to get in and out of different difficult asset classes, but there’s actually a quantifiable execution benefit to using ETFs versus bonds.

So if you look at this table here, the red column is an average retail bond spread based on this segment. So let’s say, let’s use this zfs over here. So it’s BMO short federal bonds. So these are one to five-year short-term Canadian government bonds. The average retail spread generally if you went to your retail desk as an advisor or you went to your discount broker’s bond desk would be about 75 basis points. So let’s put that into context. If you are, if you are an investor that is, or you’re earning a 4% yield on your product, you are paying just over 20% of that yield just on execution alone. So you’re, you’re basically just giving it away to the dealer where you could use the ETF. And because of the secondary liquidity, the differentiated buyers and sellers on the exchange, the ETF often and generally trades at about a seven basis point spread a one penny spread.

So, you know, when you use highly liquid and widely used ETFs, you can take advantage of some spread benefits from the ETF perspective. So in this case, from just one to five-year federal bonds, you can take, you get 68 basis points back in your pocket, back in your return just by using an ETF versus using a retail bond desk. And if you go down and you look at something like a long corporate bond at the bottom here where spreads can be 2% versus 20 basis points on the ETF, that’s 10 x right there. So, you know, you may be giving away half your yield just on execution. So that’s why we’re seeing more and more investors outside of diversification, outside of transparency, outside of, you know, looking for ways to diversify ways company-specific risk. We’re seeing more and more investors use this because it’s actually meaningful to their bottom line and to their returns.

And, and you know, the ETF has been a, you know, it’s really opened the eyes of a lot of investors as an efficient tool to get exposure and basically we get to pass through institutional pricing to the end investor using that ETF mechanism. So, you know, from an ETF perspective or from an EM perspective, you know, a lot of investors institutional institutions as well. So we have a Zed ef, which is our BM o emerging market bond ETF, very widely institutionally used because again, they may want the yield premium of EM bonds, but they don’t wanna necessarily pick Mexico versus Brazil versus China versus the Philippines. They may just say, you know what, I just want the overall risk exposure. So that’s where we’re seeing more and more investors looking at it from an institutional lens, looking at it from kind of a macro top-down perspective. And, and that’s why I think a lot of investors are, are choosing ETFs for fixed income and that, and it’s one of our fastest growing segments of the market.

Keith Richards:

So yeah, it actually, Matt I, before I was OSC portfolio manager owning my own firm and all that stuff, I was a retail investment advisor right from 1990. So I went through the whole boom of the bull, the bond market. It was fantastic. You know, rates were I’m just trying to remember, like you, you could buy good quality corporate bonds in the eight, 9% range back then easily. And of course, you know, rates plummeted and bonds went up like crazy. It was a, you know, great time to buy bonds and I bought a lot of them, but, and you’re talking about the spreads now I never saw 1% spreads. And we did see the, you know, we, but you know, that’s a pretty hobby heavy scalp, but regularly 50 beeps easily, like, regularly like 50, 60 beeps.

So, you know, you’re right. It’s like, versus the, the way an institution like an E T F can pick up these same bonds for like 0.05, you know, it’s, it’s, the, the difference is massive. And of course the retail client, I can say, cuz I was back then, you know, an investment advisor and you know, I’d see the spread right in front of me. And of course, the bond desk is just kind of trying to make some juice for themselves, but maybe protect themselves too, I don’t know. But whatever the case and then often the retail investment advisor would tack on a little bit for him or herself too, right? So, you know, you could be in that 1% if got paid full retail price, you know? Mm-hmm. <affirmative> So to speak, got a bond as an, and you’re right, it came out of their inventory.

And if they didn’t have a b, c bond, then you just chose another one. Right. And it wasn’t necessarily the best, best bond to bere buying and you’re not necessarily getting the best price because all the different desks had different prices too, you know? yeah. So anyways, I so didn’t mean to interrupt, but just verifying everything you just said I do wanna continue probing you on, you know, I on, so you’re, I know I’m changing subjects a little bit, but going back to the, the emerging markets, cuz I did see that breakout and I’m just curious about what are you guys looking at? Are you guys looking at a potential for emerging markets, bonds being an okay place to be, especially with the US dollar being so low?

Matt Montemurro:

Yeah, so I would say emerging market bonds, you know, it depends on the timeframe as well. So I think emerging market bonds long term, they, they provide, provide some excellent diversification benefits, very low correlation to your traditional Canadian fixed income. You know, I think a correlation of it’s like 0.2 or 0.3, so you know it with a yield enhancement and, and good and strong correlation benefits, you know, that can, that can be lead to better outcomes over the long term. at a portfolio level, you know, looking at the breakout I think I, I do have some concerns in, in em. I think with, you know, I think Canada and the US look to have started to control inflation. I don’t think that that is the case in many of the other countries, especially in the EM countries where, you know, you know, if you had, if you had an ETF, our ETF doesn’t, but if you had exposure to Argentina, you’re talking about a hundred percent inflation.

You’re seeing, you know, overnight rates in places like Pakistan at 25%, you know, those types of rates to quell off inflation. I think it’s a dangerous period. I think some of the breakout that we’ve seen recently is that the IMF has actually come in and, kind of backstop quite a few of these emerge emerging market nations, making sure that they can pay their debt and make sure that you know, as long as they restructure, you know, nothing’s gonna default. So that’s good. And that’s been a catalyst in the EM market. But I do look forward and I do have some concerns, especially in the near term as like, you know, countries like Pakistan, the Philippines Ukraine is still a, a very, a big portion of a lot of emerging market debt.

So they’re still in the midst of a war. You know, those types of countries I think do have some headwinds ahead of them and I think it’s gonna take them a lot longer to control inflation. And I think, you know, with rates at 25%, you, you’re, the only thing that can happen is that growth is gonna slow down there. So I think long term, I think there’s an opportunity, think it’s a, it’s a good portfolio building block, but looking to add the position, I’d just be a little bit concerned because I think some of that catalyst was more on kind of the IMF coming in. Like they, they came in, I think we saw on a kind of a 10 to 15% rally in Pakistan bonds just at the, the, the first week at last week of June, or first week of July, because the I M F came in and said, Nope, we’re not gonna let them default. They’re gonna restructure. We’re, we’re all good. So it’s kind of like a, an external force that that, that is causing a little bit of that breakout in that catalyst. So I am a little bit concerned about em credit as a whole but longer term, hey, I think you, you start to see we did see a little bit of negative returns last year. If we do see some selloffs, you know, I think long term, em has a place in, in an overall fixed income portfolio context.

Keith Richards:

Excellent. Yeah, so it’s interesting because I posed the same question to Craig who does the bond portfolio mostly at ValueTrend, and he pretty much echoed the same thing. He said, look, there’s, there’s too many moving risky parts in, in that part of the world right now, and he wasn’t comfortable with the trade, so we never ended up buying. So that’s interesting. <laugh>, great minds take alike, right? So okay. So was there anything like, I was gonna ask you the final question, which was the market indicators and whatnot, but was there anything else you wanted to cover on your charts here?

Matt Montemurro:

Yeah,  I mentioned in my overview at the beginning, I like investment-grade credit. And one of the reasons why I like it is if you look at Canadian credit, you look at levels now relative to historically and the 10-year average, we’re about 40 to 50 basis points wider than the 10-year historical average. And what that tells me and says, okay, we saw an equity market rally last year or to start this year, and we’ve seen a risk on environment overall. Why aren’t Canadian credit spreads and US credit spreads for that matter tightening more, why are we still sitting wider than those historical levels? And for me, the reason is I think the bond market is, is bearish and they’re thinking that a potential slowdown in growth or recession is coming.

So they’re not willing to pour into corporate bonds and tighten those spreads up to historical levels. So for me, that downside, some of that spread widening that you might see during a recession, during a slowdown is already been priced in. You’re already, we’re already sitting at those wider levels. So for me it’s like, look, you’re getting a 5% yield, you can lock that in now at spreads that are 40 to 30 to 40 to 50 basis points, depending on where you are on the curve wider than the historical norms, that’s gonna weather some of the downside if we see a growth sell off. And then I think when you flip things over and, and if it’s a softer inflation, it’s a, you know it’s a softer landing, you know, what we’re gonna see is we have a lot of runway to, to see spread tightening. So I think based on where current spread levels are right now, not to mention current yield levels, I think, I think investment grade credit in the short end is a wonderful trade right now. and then when you’re,

Keith Richards:

You, sorry, when you’re talking spreads. Yeah, just so the audience knows, as it spreads off of the federal, you know, in this case, I guess Exactly. Bonds, long bonds, I would assume.

Matt Montemurro:

This charter here has all three. So the blue line is long bonds, so basically long corporate

Keith Richards:

Bonds, Canadians, I mean, so long Canadian federal,

Matt Montemurro:


Keith Richards:

Bonds, right? That’s

Matt Montemurro:

Exactly, so, so this, yeah, so this is long, mid-short, and then overall corporate. So you can see that kind of, it all has the same trend, but you’re seeing kind of that same, you know, higher than that 10-year average across, across the board. But yeah, so it, it’s basically the difference in yield from a corporate long bond versus minus the yield of a government of Canada long bond and, and how that spread compares over time.

Keith Richards:

Yeah, yeah. I just wanted to clarify that so people knew what you were referring to. So, okay, sorry, I interrupted you, you were <laugh>.

Matt Montemurro:

No, and then you had mentioned market indicators and this is something, and I put up this like a heat map of flows. and this is something that we’re seeing in increased usage of ETFs where it’s not just in someone who’s on the technical side. I think this is something that we’re seeing more and more regularly where investors are actually using ETF information to put in their investment process. They’re using it as data, it’s free data, it’s available, we have it available on, on our website. We post it monthly and we post it year to date. And what it actually shows is basically flows a u m money coming in or coming out of certain ETF products. And because the ETF market is so segmented, so for example, let’s just look at the fixed income cuz that’s my baby, you know, we have funds that go short along the yield curve, short, mid-long, and we have funds across the credit curve, corporate, provincial, federal.

So what that allows us to do is see, okay, where are flows going, where is money coming in, where is money coming out? So in this case, we’re seeing month over month, we’re seeing a lot of money. The most amount of money comes into long government exposure. So long federal exposure year over year, same thing, that trend. So what does that tell you? That tells you that the market investors, and, and one of the things that I want to come back to is that, you know, this necessarily wasn’t all that useful in 2010 in the early days of ETF adoption, but in 2023, we’ve seen a big increase in, in use the user base of ETFs. So we have institutions, we have advisors, we have do-it-yourself, investors, and they’re all doing different things at the, at different times. So what it really does is give you a good indicator of how the market is feeling because it’s a very differentiated user base.

So in this case, it’s telling you that, you know, month over month and year over year. So longer-term trends are showing that investors are regularly putting money into long federal bonds. We talked about that, that breakout of long bonds. Well, you’re seeing it in terms of flows. And so what we’re starting to see is a lot of investors say, actually this is very valuable information. You see it in the US all the time. You see daily trading reports and say, oh, 3 billion went out of some of the US high-yield ETFs. What does that mean? Does that mean there’s a risk off trade? Oh look, month over month we saw 15 billion leave investment-grade credit. You know, those are the type of things that, oh, that’s a trend in the market because of the proliferation of the usage of ETFs and such a diversified user base.

It can give us information as to how we can position our portfolios. So we’re seeing a lot of investors use this information and layer it into their investment process. And again, it’s not something that it’s, oh, this is going to give you the answer, but often it is, hey, if you have a question and you’re considering, hmm, is it time to put on duration? I think it might be time. What, you know, using something as simple as this, a free resource looking and saying, okay, well actually, you know what, the market’s showing me that, that that was a longer-term trend. And it’s a shorter-term trend. Investors in, in increasing amounts, are putting money toward long duration product. And you can see the same thing on the equity side of the portfolio as well, where you’re looking, okay, is the money going to Canada, US global emerging markets is it going into a specific factor?

You know, we’re talking low vol dividends quality, you know, all of these different heat maps and we have a whole list of of the breakdown, you know, gives you information that you, you couldn’t have got otherwise, especially in fixed income, which is o tc, it’s very opaque, you know, it’s always tough to find trends. So, the ETFs have, have become an excellent indicator of trends in the market and really can help solidify a specific view you may have. And or it may contrary, maybe you say, you know, it’s time for me to go long duration. And then you’re seeing, oh, wow, that’s interesting. Why are there so many outflows in long duration? Did I miss this trade? Am I missing something? And, and we just hear a lot of that conversation go and, you know I think, you know, because of how segmented the ATF market is, you know, high yield investment grade, em, you can really see those trades on a very regular basis.

And, you know, we have, we have institutions that I have calls with every, every week that I, I say, oh, here are the flows. We talk about the heat maps. Oh, that’s interesting. Why is it doing that? So, you know, we’re really seeing a widespread adoption of that. And again the thing that I stress, especially from the institutional side, it’s a, it’s a free input that you can put into your investment process. You know, we all have different screens that we look at, you know, all the different charts, we look at all the different indicators. It’s just another indicator that can just add a little bit of value. It’s not, not a crystal ball, but at least it can help your decision making process.

Keith Richards:

So actually tied into that as I understand it, especially within the fixed income ETFs, now, I know equity ETFs are often driven at least by a large part, by retail investors. They’re the buyers. But with fixed income at least from what I’m hearing from you a lot of the ETFs are being bought by the institutions. Like they’re, they’re actually being used by the larger money. And we, you know, tech in technical analysis, I’m a, I do a lot of work on sentiment and when we have like kind of, we group people into two groups, smart money and dumb money, you know, which is a kind of a cute little way of saying institutional versus retail. And you know, when, so when I see flow by retail, you know, into something, then yeah, sometimes I get worried, right? It’s a contrarian indicator. But when I see flow by institutions, and that seems to me that that’s what your bond indicator here is telling me that, you know, if we’re starting to see the, the dark darkening on the government long bonds Yep. That means that there’s more money flowing into those ETFs and a lot of that is institutional money. Is that correct?

Matt Montemurro:

That is correct. And, and that’s where, you know, I think the like you said, I think traditionally you know, the ETFs were, you know, a retail product and we’ve seen institutional uptick over time. but you know, the fixed income space is, is something that over the last six or seven years we’ve seen kind of that spike in exponential growth in the usage of ETFs. And we’ve gone, you know, we’re probably close to 50-50 now in terms of institutional versus kind of retail users of, of fixed income ETFs. And it’s, it’s, you’re, you’re completely right, it is a higher percentage than we see on the equity side. And I think part of it is, you know, inherent challenges in the fixed-income market. There are liquidity concerns, there’s, there’s different parts that we don’t or different factors or opaque factors that challenge the fixed income markets.

So a lot of asset managers and institutions are, are using the ETF as not only exposure vehicles, but trading tools, you know, buying the high yield ETF now and waiting, leaving that in there for a month while they find the specific bonds that they wanna buy, and then they sell the ETF and buy the specific bond. So that would, that’s what I would use. That’s a trading tool. They get the exposure, they get the beta, and then they wait for their opportunity to buy the specific name and then they sell it out. So we’re seeing more and more institutions do things like that. and then we see, you know, asset allocators that are looking and, you know, they use these ETFs as, as levers and to put risk on and take risk off. And, you know, I think that is really showing through in, in some of the heat maps that I showed. but I, I think the fact that it’s that 50-50 institutional to not to retail has really changed the market because we’re, we, we really get a, a very diverse user base when, when you’re trading ETFs.

Keith Richards:

Excellent. Yeah. And even for those who use, which a lot of the viewers will use, it’s kind of a common technical analysis website. they have heat maps and you can look at long bonds, and that’ll be the same idea cuz they use the ETFs actually on those heat, heat maps. So that’s a great commentary. Well, Matt, that was that was great. So what, you know, we’ve, we’ve learned a little bit about the bond market and you know, stuff that refreshed my memory. I remember those spreads that you talked about at the beginning. It’s kind of funny, I hadn’t thought about that for a while, but that’s great. And just for the record at ValueTrend in our equity plat, so our fixed income platform, we largely use ETFs with the exception of some short-term stuff. We’ll flip a couple of, you know, GIC type of things, just, you know, one year pay whatever, one-year GIC to get a yield. But for our bond bonds, we, we are, we a hundred percent agree with you on that, the ETFs are the way to go. So thank you for, for coming and, and partaking of your wisdom and maybe we’ll have you on again in another year or so. I really appreciate you, you being here.

Matt Montemurro:

Thanks for having me, Keith. No, this was a fun conversation and always happy to chat with you and yeah, I’d love to come by come by whenever you got a spot for me.

Keith Richards:

Excellent. Well, well, thanks Matt.


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