‘Financial catastrophe’ looms as new ETFs keep coming
OPINION: Fixed income has been an overlooked and misunderstood asset class for most Australian retail investors. Hopefully, bonds have our attention now.
The yields on one, two and three-month US Treasuries are well above 5 per cent. Even one-year yields are getting up there. It was only a matter of time before someone launched a passive fund giving us exposure to short-duration US government debt.
VanEck’s 33rd ETF product does just that. The group will list its one to three-month US Treasury Bond ETF (ASX: TBIL) tomorrow (18 May).
Arian Neiron, CEO and managing director of VanEck Asia Pacific, said the new product is the first short-term US Treasury bond ETF of its kind listed on the ASX. But there is no shortage of passive bond funds out there. They have been the investment vehicle of choice for unsophisticated investors with 60/40 portfolios. Robo-advisers love them.
Launching a passive fund of AAA-rated US government debt appears to make sense. High inflation and rising interest rates have lifted bond yields significantly in the past year. And for those looking for a decent coupon and capital preservation, US Treasuries fit the bill (pun intended).
On an inverted yield curve, short-term bonds don’t just offer a higher yield and coupon; they are also less sensitive to interest rate changes than longer-duration bonds because they simply have less time to be impacted by things.
But a bet is a bet — and an interesting one to make when the US government runs out of cash.
On Tuesday (16 May), US Secretary of the Treasury Janet Yellen told the Independent Community Bankers of America (ICBA) 2023 Capital Summit that the Treasury will likely no longer be able to satisfy all of the government’s obligations if Congress has not acted to address the debt limit by early June — and potentially as early as June 1.
“It is impossible to predict with certainty the exact date when Treasury will be unable to pay all of the government’s bills, and I will provide an additional update to Congress next week as more information becomes available,” Yellen warned.
“Nonetheless, our current best estimate underscores the urgency of this moment: it is essential that Congress act as soon as possible. In my assessment — and that of economists across the board — a US default would generate an economic and financial catastrophe.”
Whatever happens, financial markets are in for a rough ride. This means smart investors will be seeking out active strategies and putting their money with the pros. Not necessarily to find alpha, but purely to preserve what they’ve got.
The trouble with passive bond investments like fixed income ETFs is that they ignore the information required to make critical calls and clear predictions in a dynamic macroeconomic environment. And there are far more people invested in passive fixed income ETFs than active ones.
Index behemoths like Vanguard have made incredible sums of money selling passive investment vehicles to the masses. For many years, buying an index in global equities or big tech or commodities worked well for the average retail investor. ETF giants have built their businesses off the bet that unsophisticated investors will remain so.
AUTHOR
James Mitchell
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