Millennials seem to dig bond ETFs despite volatile fixed-income market, Charles Schwab finds

By Christine Idzelis

Is 60-40 the right mix of stocks and bonds?

Hello! This week's ETF Wrap gives you a look at the findings in Charles Schwab's latest annual ETF survey as well as how Thursday's economic data rippled through the bond market.

Please send feedback and tips to christine.idzelis@marketwatch.com or isabel.wang@marketwatch.com. You can also follow me on X at @cidzelis and find me on LinkedIn. Isabel Wang is at @Isabelxwang.

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The volatile bond market hasn't turned off millennials, with investors in that generation in particular embracing exchange-traded funds for their exposure to fixed income, a survey by Charles Schwab's asset management business found.

Millennials' relatively high use of fixed-income ETFs stood out in the survey, David Botset, managing director and head of equity product management and innovation at Schwab Asset Management, told MarketWatch during an interview Wednesday on the sidelines of the Schwab Impact 2023 conference in Philadelphia.

Schwab found that millennial ETF investors have an average 45% of their portfolios allocated to fixed income, compared with 37% for Generation X and 31% for Baby Boomers.

The U.S. bond market has suffered broad losses this year amid heightened volatility as interest rates continued to climb, following a steep drop for investment-grade bond ETFs in 2022. Schwab's survey, conducted from June 13 -- June 28, included individual investors between the ages of 25 and 75 with at least $25,000 in investable assets.

Millennials may be attracted to the higher yields now available in the bond market, while also getting more comfortable with using ETFs for fixed-income exposure after seeing the fund structure work well through volatile patches in the markets, according to Botset.

He described millennials as being familiar with the ups and downs of markets, including such turbulent times such as the global financial crisis of 2008 and the COVID-19 crisis in 2020 as well as around the regional-bank failures earlier this year.

Generally, investors like ETFs because they can easily trade in and out of them, but also because the funds are a tax efficient and low-cost way to diversify portfolios, according to Botset.

Within fixed income, Schwab Asset Management announced in September that it reduced the operating expense ratios for the Schwab High Yield Bond ETF SCYB and Schwab U.S. TIPS ETF SCHP, bringing fees for its entire fixed-income ETF lineup to just three basis points.

Is 60-40 the right mix?

Among ETF investors, 63% view the traditional portfolio consisting of 60% stocks and 40% bonds as the right mix to meet their financial goals, according to the Schwab study. On average about 39% of their portfolios are in fixed income, with 61% in equities, the survey found.

Some bond investors may be looking to "lock in rates" before the Federal Reserve begins to lower interest rates again, should the economy weaken into a recession, said Botset. Meanwhile, the U.S. economy sharply expanded during the three months through September.

The market is largely expecting the Fed to hold its benchmark interest rate steady at its policy meeting next week, after the Bureau of Economic Analysis on Thursday estimated that U.S. gross domestic product jumped to an annual rate of 4.9% in the third quarter.

"Our expectations are for slower GDP going forward as positive contributions from volatile net exports and inventories are unlikely to be repeated," said Lindsay Rosner, Goldman Sachs Asset Management's head of multi-sector fixed income investing, said in emailed comments on Thursday. She said that Goldman "will be monitoring developments in private domestic demand -- consumption and investment -- rather than headline GDP."

'Does not move the needle'

Fed-fund futures point to the central bank maintaining its benchmark rate at 5.25% to 5.5% at its policy meeting that concludes Nov. 1 and for the remainder of 2023, according to CME FedWatch tool, at last check. The Fed has aggressively hiked its benchmark rate from near zero in March 2022 to a 22-year high after its last increase in July in a bid to bring down inflation.

The third-quarter GDP report "does not move the needle for the November FOMC meeting which is certainly a skip," Rosner said. "Higher and hold, yes. Higher and hiking, no."

Read: Why T. Rowe Price's CIO thinks 10-year Treasury yields may keep rising -- and how he's positioned in markets

Bond ETFs were broadly climbing on Thursday afternoon as Treasury yields were falling.

Shares of the Vanguard Long-Term Treasury VGLT were up around 1.4% while the Vanguard Intermediate-Term Treasury ETF VGIT climbed 0.6% and the SPDR Bloomberg 1-3 Month T-Bill ETF BIL rose less than 0.1%, according to FactSet data based on late afternoon trading.

But this year's surge in yields has created losses for many fixed-income ETFs so far in 2023, with the iShares Core U.S. Aggregate Bond ETF AGG down 2.9% on a total return basis through Wednesday. Last year the fund, which tracks an index of U.S. investment-grade bonds, lost a total 13%, after losing 1.8% in 2021 on a total return basis.

The yield on the 10-year Treasury note BX:TMUBMUSD10Y fell 10.9 basis points on Thursday to 4.843%, after last week reaching its highest rate since July 2007 based on Dow Jones Market Data citing 3 p.m. Eastern Time levels.

Read: Yellen says she doesn't see signs of recession after GDP report

As usual, here's your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good...

   Top Performers                                                                                                                                                                    %Performance 
   ProShares Bitcoin Strategy ETF                                                                                                                                                    20.8 
   Sprott Uranium Miners ETF                                                                                                                                                         3.8 
   VanEck Vietnam ETF                                                                                                                                                                2.8 
   Global X Uranium ETF                                                                                                                                                              2.3 
   United States Natural Gas Fund LP                                                                                                                                                 2.3 
   Source: FactSet data through Wednesday, Oct. 25. Start date Oct. 19. Excludes ETNs and leveraged products. Includes NYSE, Nasdaq and Cboe traded ETFs of $500 million or greater 

...and the bad

   Bottom Performers                    %Performance 
   AdvisorShares Pure US Cannabis ETF   -12.7 
   Invesco Solar ETF                    -8.8 
   iShares Mortgage Real Estate ETF     -6.2 
   SPDR S&P Semiconductor ETF           -5.9 
   WisdomTree Cloud Computing Fund      -5.8 
   Source: FactSet data 

New ETFs

Goldman Sachs Asset Management announced on Thursday the launch of the Goldman Sachs S&P 500 Core Premium Income ETF (GPIX) and Goldman Sachs Nasdaq-100 Core Premium Income ETF (GPIQ). The actively managed funds "seek to provide investors with an opportunity to generate current income and growth through a dynamic options overwrite strategy," according to the announcement.YieldMax said Oct. 24 that it launched the YieldMax MRNA Option Income Strategy ETF MRNY, which aims to provide monthly income via a synthetic covered call strategy on Moderna Inc. MRNA. The fund will not directly invest in the biotechnology company.

Weekly ETF reads

Bond ETFs see 'crescendo' of investor demand after yield surge in volatile fixed-income market, says Invesco's Paglia (MarketWatch)Moderna's stock snaps record losing streak as Cathie Wood's ETF boosts stake by more than $4 million (MarketWatch)Bitcoin rallies to almost 18-month high on ETF optimism (MarketWatch)U.S. SEC has 8-10 filings of possible bitcoin ETF products (Reuters)ETFantasmagoria (Financial Times)Goldman's JPMorgan Copycat ETF Launches in 'Early Days' of Boom (Bloomberg)A Small ETF Defies Historic Bond Rout With 200% Return (Bloomberg)How ETFs are bracing for the turbulence of El Niño (Financial Times)

-Christine Idzelis

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10-26-23 1633ET

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