Final Trades: Virtu, JPMorgan & Pfizer from CNBC. ...
Iâve written before about recent developments in fixed income sustainable investing, such as the increasing availability of ESG-focused bond indexes.
Today I want to talk about a lesser known segment of the sustainable market: green bonds. And once again I wanted to invite in one of BlackRockâs experts to help me explain the topic. Please join me in welcoming Ashley Schulten, BlackRockâs Head of Responsible Investing for Global Fixed Income.
Matt: To get us started, can you tell us what a green bond is? I assume itâs not a bond contract written on recycled paper!
Ashley: No, itâs not about the paper! A green bond is a debt instrument in which the issuer commits to using the borrowed money for projects deemed environmentally beneficial. These can include everything from installing solar panels at factories to improving energy efficiency to constructing green buildings. The key is that the bondâs proceeds are ring-fenced on the issuerâs balance sheet to finance these green projects, so investors know that the money being raised is only going to go to the green projects outlined by the issuer. Importantly, a green bond doesnât have to be issued by a green company, per se.
Chart represents the global market of labeled green bonds.
Matt: Sounds like an interesting option for those investors focused on the environment. Is this a new market? How big is it?
Ashley: The market has actually been around for more than a decade, but has really taken off over the last four years. Today there are almost $475 billion in green bonds outstanding, with over $150 billion issued in 2017 alone (source: BlackRock, Bloomberg, as of 6/30/2018). That market is global and spread across a range of public and corporate issuers.
Read more about Sustainable investing.
Matt: Wow, thatâs a significant trend. How should investors think about green bonds from a portfolio perspective?
Ashley: As you said earlier, green bonds may appeal to investors focused on the environment. More specifically, they offer investors the ability to pair their financial and environmental objectives. Investors can still access the bond market as a way of seeking income and adding diversification in a broad portfolio. At the same time, they can know that their investment will go towards funding projects designed to address climate and other environmental issues.
Matt: Those new to sustainable investing may be confused about the differences between green bonds and ESG investing. Can you break it down for us?
Ashley: As I mentioned, a bond is deemed âgreenâ based on what the issuer will use the money to fund. If the use meets specific structuring and environmental criteria, then the issue can qualify as a green bond. ESG, meanwhile, is a measure of the Environmental, Social, and Governance aspects of a bond issuer. ESG ratings are applied to a company as a whole, and thus impact all of that companyâs debt. Every bond issuer can be assigned an ESG rating if the information to do so is available. Green bonds are a related concept, but different in that they are uniquely focused on what the issuer is funding.
Matt: Where might an investor put green bonds in their portfolio?
Ashley: We typically see investors using green bonds as a substitute for government or corporate bonds. For example, an investor who had a 10% allocation to global bonds might take half of that exposure and place it into a green bond investment. This would preserve the investorâs global bond allocation, while increasing the environmental impact of the overall portfolio.
Matt: All right, final question. How can investors access the green bond market today?
Ashley: Thatâs one of the most exciting developments that weâre seeing in this market today: as issuance has grown so has the availability of diversified investment options. For example, iShares just launched the iShares Global Green Bond ETF (BGRN). The issuers in this global market are generally investment grade. Although the fund seeks to track an index of global investment grade bonds, hedges are used to mitigate foreign currency risk. Additionally, for investors who want to get a sense of how âgreenâ their investments really are, green bond issuers offer publicly disclosed reporting on the impact of their projects, like the amount of CO2 reduced. Fund investors can likewise see the âgreennessâ of the overall portfolio alongside other data.
Matt: That sounds like an exciting new option for investors to consider. Ashley, thank you for your time.
this is incredible pic.twitter.com/znPTliZpEv — Josh Billinson (@jbillinson) November 16, 2018 This is what you’re up against each day. Try not to push yourself too hard or expend too much energy. And stop talking to the wall. ...
Final Trades: Walmart, Royal Dutch Shell & JPMorgan from CNBC. ...
This might be one of the most important conversations we’ve done at The Compound this year. It’s every investor’s worst nightmare and we get people asking us about this scenario all the time. Ben Carlson looked at what every retiree’s worst nightmare would look like under a range of stock market crash scenarios. Taking a hypothetical 60% stocks / 40% fixed income portfolio, assuming a steady annua...
While much ink has been spilled this year on the rout in emerging markets, and, more recently, the fall from grace of technology stocks, natural resource shares are actually the worst performers year-to-date. The S&P Energy Sector Index is down more than 5%, underperforming the S&P 500 by approximately 900 basis points (bps, or nine percentage points).
More interestingly, although oil prices have dropped sharply in recent weeks, they have not collapsed, unlike in early 2016. West Texas Intermediate Crude (WTI) is flat year-to-date, but the global benchmark Brent is still up 6%. This suggests that either the recent collapse in energy shares looks overdone or oil prices have further to fall. Consider the following:
Valuations hard to justify
As I’ve discussed in many previous blogs, value is a poor market timing tool. Neither cheap relative or even absolute valuations guarantee a bottom. The comparisons against both the broader market and oil prices could simply mean that the S&P 500 and/or oil prices might be too expensive, rather than energy shares too cheap. That said, both the market and oil would have to fall a significant amount to justify today’s sector valuation. As a simple example, if the historical relationship between oil prices and relative valuation were too hold, oil prices could fall to $40/barrel, roughly where they bottomed in 2016, and the energy sector would still appear underpriced.
Finally, there may be another reason to consider raising the allocation to energy shares. Historically, energy stocks have been more resilient than the broader market during periods of rising interest rates and/or inflation. If part of what has dislocated the market this year is the prospect for higher rates and an overheating U.S. economy, energy stocks seem a logical hedge. All of which suggests that for investors sifting through the rubble searching for bargains: Consider U.S. energy companies.
So you’re all set to begin saving your literal behind off – you’re on fire about FI/RE, or you’ve just gotten to the point where you know you need to start saving if you’re ever going to get ahead. Problem is, you have no 401k available to you through your employer. Most all advice says to max out your 401k in order to really jump-start your retirement savings, so what can you do to save if you have no 401k? For the purpose of this article, we’re referring to 401k plans in general. If your employer offers a 403b plan instead of a 401k, of course that’s the best replacement. The same is true for 457 or Thrift Savings Plans (governmental), or SEP-IRAs or SIMPLE IRAs where offered.
Turns out there are several things you can do to save with no 401k. The 401k has only been around for 40 years (Actually 40 years this year: Happy Birthday, 401k!), and people have been saving for centuries without 401k plans. Plus, the good news is that even if you have a 401k available to you, many of the options listed below are also available to you, some more limited than others due to your participation in a 401k. But feel free to mix and match savings vehicles as allowed – the more ways to save, the better!
First, let’s take a look at why the 401k is such a popular option:
There are many more benefits to the 401k, but those are the most significant ones that serve the purposes of this article. Now let’s look at some alternatives.
If you have no 401k available from your employer and your spouse also does not have a 401k with an employer, you can open and fund a traditional IRA. The contribution limits are significantly less than the 401k limits listed above. Let’s run through the five benefits of 401k’s and compare them to an IRA:
Now, if your spouse is participating in a 401k or other retirement plan from his or her work, there can be limits on the deductibility of your IRA contributions. If your spouse participates in a 401k plan, you can fully deduct IRA contributions if your household income is below $189,000, and limited deduction is available up to $199,000 (2018 figures). These figures have increased to $193,000 and $203,000 respectively in 2019. Above those limits, the tax-deductibility benefit (#3) of contributions is lost. At this stage you would make the decision of whether it makes sense to still make non-deductible contributions to your IRA, or choose another option from the choices below for your saving activities.
A point in favor of an IRA (versus a 401k) is that you are not limited to an arbitrary list of possible investments like most 401k plans are. So you are free to make wise decisions about your investments in the IRA account, keeping the internal costs low in order to keep more of your money working for you.
Another item that makes the IRA a bit more favorable is that you can access the money much more easily than when it’s in a 401k (especially if you’re still employed by that employer). The downside is that with this flexibility comes the responsibility to maintain discipline and not raid your long-term retirement savings until you’re actually in retirement. There are penalties for early distribution from an IRA to help with maintaining this discipline, but you’re still in charge. Don’t blow it!
So the IRA, although limited in the amounts that can be deferred, and with the income limitations in some cases, matches up pretty well with the 401k for benefits, with the virtually unlimited investment flexibility as a positive point for the IRA. As mentioned, a Roth IRA could be another alternative if the tax-deduction feature is not as important to you.
This is a good place to start. Let’s see what other options are available to save.
Health Savings Account
If you have this option available to you, a Health Savings Account (HSA) can be another avenue for longer-term savings. If you have a High Deductible Health Plan available via your employer or you have set one up as a self-employed person, the Health Savings Account can provide a good place for savings.
Looking at the list of 401k benefits versus an HSA:
If you don’t need to raid the HSA during your pre-retirement years to pay for medical expenses, a HSA can provide a significant resource for paying medical expenses later in life.
As you can see, the HSA is yet another alternative that can work in a positive way toward your savings goals when you have no 401k. They’re much more limited in the amounts you can contribute, but otherwise have most of the same features available as a 401k.
Taxable investment account
Don’t let the inclusion of “taxable” in the name of this savings vehicle put you off. It’s really not as bad as all that – this name is used to make it clear that this account is not allowed to defer income tax in the manner that a 401k or IRA can. With a taxable investment account, any time there is an income event, you will be responsible for including that income on your tax return and paying tax as applicable. This type of account can be easily set up at a multitude of brokerages, mutual fund companies, and the like.
Let’s do the comparison to a 401k:
We give up points #1 and #3 to the 401k in this comparison, but you have no limits (#2), you can set up the automatic contributions (#4), and depending on your investment choices, the taxation or tax deferral may be even more favorable in a taxable investment account.
Even more than with the IRA, you have pretty much unfettered access to your taxable investment account for withdrawal at any time, regardless of your age. This can be a positive or a negative, depending on the circumstances. If you have a short-term need for some money that can’t be found elsewhere, this account can be just the ticket to allow you to not go into debt. But you need to be cautious, especially if your taxable investment account represents a significant portion of your retirement savings. You don’t want to derail the hard work you put into saving that money by withdrawing before its intended use in retirement.
If you happen to be self-employed (even with a small side hustle), you have several alternatives available to you. One of the obvious options is a one-person 401k plan, or solo-401k. Although there can be some paperwork headaches involved, this option gives you the same flexibility as an employer-sponsored 401k, except that you’re in charge. Your contributions are limited to the same limits as a 401k from your earnings, but you can also make contributions as the employER in the arrangement as well. You can contribute up to 25% of compensation as the employer, up to a total of $55,000 in 2018, or $56,000 in 2019. This amount is reduced by the compensation deferral amount, not including your catch-up contributions.
Another alternative for a self-employed individual or small business is the SIMPLE IRA. This option is a bit less onerous than the solo 401k, with lower contribution limits. As the employee, you can defer up to $12,500 of your compensation with a $3,000 catch-up contribution if over age 50 (2018 figures – for 2019 the contribution limit is increased to $13,000, with the catch-up still at $3,000). As the employer you are required to make either a matching 3% contribution or a non-elective 2% contribution to all plan participants. If you’re a one-person shop, this can be a good alternative, offering matching benefits to a 401k plan, except for the contribution limits.
Still another option for the self-employed is the SEP-IRA. Again, with limited paperwork versus the 401k plan, the SEP-IRA gives a self-employed individual the ability to defer up to 25% of your compensation, with the limits of $55,000 for 2018 or $56,000 in 2019, plus the over-50 catch up amount of $6,000.
In several states, there may be an option available soon: Oregon is the first, and California is starting in 2019, to offer state-based retirement plans for small employers. If you’re in one of the states that are planning these accounts (Oregon, California, Illinois, Maryland, Connecticut, New Jersey, New York, Washington state, Vermont and Massachusetts), keep your eye out for more information. This can be a good option if you have no other means to start saving.
Some folks would also recommend looking at an annuity as an alternative when you have no 401k available. Annuities can have many of the features of a 401k plan except for tax-deductibility, with the additional benefit of flexible contributions with no annual limits. A downside to annuities can be the internal costs – because you are paying for insurance against your longevity, these internal costs can be a significant drag on your returns in an annuity. A plus for annuities is that they can provide guaranteed lifetime income to you upon retirement, where most other plans have no such capacity for guarantee.
As a last point, keep in mind that you can use many types of investment for your retirement savings – including all of the above in varying amounts, plus other types of investments like real estate. The best sort of retirement savings plan includes portions of many types of investing and saving activities, providing a varied type of income from many sources through your future retirement. Use as many of the above types of investment as you can!
Do you have other alternatives to offer that I’ve overlooked?
Two decades ago few options were available to retail investors looking to assemble baskets of corporate bonds. One option was to call a broker, who in turn picked up the phone and worked orders through dealers on Wall Street.
This process was often difficult and expensive. And it could take weeks–sometimes longer–to build a diversified bond portfolio. Instead, most people paid active managers to trade and manage bonds for them in mutual funds.
Then came iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), the first-ever exchange traded fund tied to corporate bonds. Credit ETFs trade heavily now, but looking back to 2002, it’s hard to appreciate how novel LQD was at the time. It tracked a well-known index of investment grade bonds, providing diversification and trading efficiency.
Suddenly, individual investors could access the broad corporate bond market. A mix of 100 corporate bonds could be purchased for just pennies in bid/ask spread and 0.15% per year in fund expenses.
Adoption borne from crisis
Many institutional investors became aware of LQD during the financial crisis. As bond markets seized up, LQD continued to trade on exchange throughout the day, providing real-time markets and price discovery–especially during the memorable week roughly one decade ago that Lehman Brothers declared bankruptcy.
LQD’s trading volumes have climbed as investors recognized the fund’s utility. Liquidity, as measured by average daily volume, has grown steadily; liquidity spurred more liquidity, and encouraged additional adoption by institutional investors. The experience of LQD has been mirrored in other corners of the corporate debt market, where iShares iBoxx $ High Yield Corporate Bond ETF (HYG) has become a de facto proxy and trading instrument for the high-yield bond market. Indeed, HYG’s trading volume as a percentage of total daily volume in individual high-yield bonds rose to 19% in October, a record.
Sixteen years after the launch of LQD, the ETF has $34 billion in assets under management. It trades $725 million on average each day, up 38% from a year ago. In stressed market conditions, it has traded even more, recently as much as $2.1 billion. As volumes grow, investors can now use LQD to quickly obtain diversified exposure to more than 1,000 bonds with a single, on-exchange trade.
Investors’ predilection for LQD continues to surface in notable ways. Last year was the first time that LQD’s average daily volumes surpassed that of the most liquid individual investment grade bonds, including Verizon and JP Morgan. Adoption by insurance companies, whose portfolios rely on stable fixed income exposures, recently made LQD their most heavily owned ETF across industry portfolios. Earlier this year, LQD broke the record for the single-largest “block” trade in bond ETF history, a signal that large, institutional investors are confident about their ability to trade and manage risk with LQD in size.
What do investors get with LQD?
Beyond liquidity, LQD offers investors a highly diversified exposure to the investment grade corporate bond market across more than 1,000 bonds. LQD seeks to track a broad index, providing investors with access to bonds in all major sectors, including communications services and industrials. That makes the product potentially suitable for investors seeking broad exposure to the investment grade corporate bond market.
For investors with more targeted views, the LQD family suite offers choices to access the investment grade corporate bond market more narrowly. The iShares 0-5 Year Investment Grade Corporate Bond ETF (SLQD) offers access to bonds with shorter maturities; the iShares 5-10 Year Investment Grade Corporate Bond ETF (MLQD) offers access to bonds with medium maturities; and the iShares 10+ Year Investment Grade Corporate Bond ETF (LLQD) offers access to bonds with longer maturities. The iShares Interest Rate Hedged Corporate Bond ETF (LQDH) allows investors to seek to mitigate interest rate risk and express a more direct view of bond issuers’ financial health, and the iShares Inflation Hedged Corporate Bond ETF (LQDI) allows investors to specifically hedge against inflation risk while still owning LQD’s corporate bond exposure.
We believe that even more milestones lie ahead for LQD and bond ETFs in general as a growing chorus of investors recognize the benefits that bond ETFs provide in terms of access, efficiency and liquidity. Taken together, the iShares suite of investment grade bond ETFs are indispensable tools for investors of all types and sizes to access and manage risk in the investment grade bond market.
Stephen Laipply, Managing Director, is the Head of U.S. iShares Fixed Income Strategy and a member of BlackRock’s Systematic Fixed Income Product Strategy Team. Bloomberg, BlackRock, FINRA TRACE; HYG’s one month rolling exchange volumes as percentage of high-yield cash bond volumes hit a record on Oct. 31, 2018; (HY OTC 144a volumes are included in the HY cash volumes).  BlackRock as of Sept 28, 2018.  BlackRock; Bloomberg (Daily notional trading volume hit a record Oct. 11, 2018)  BlackRock, TRACE, as of 9/28/2018  S&P Global Market Intelligence data compiled April 10, 2018.  BlackRock, TRACE, as of 9/28/2018 Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal. Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities. The Fund is actively managed and does not seek to replicate the performance of a specified index. The Fund may have a higher portfolio turnover than funds that seek to replicate the performance of an index. There is no guarantee that interest rate risk will be reduced or eliminated within the Fund. LQDI: The Fund's use of derivatives may reduce the Fund's returns and/or increase volatility and subject the Fund to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. The Fund could suffer losses related to its derivative positions because of a possible lack of liquidity in the secondary market and as a result of unanticipated market movements, which losses are potentially unlimited. There can be no assurance that the Fund's hedging transactions will be effective. Investing in long/short strategies presents the opportunity for significant losses, including the loss of your total investment. Such strategies have the potential for heightened volatility and in general, are not suitable for all investors. The Fund's use of inflation hedging instruments is intended solely to mitigate inflation risk and is not intended to mitigate credit risk, interest rate risk, or other factors influencing the price of investment-grade corporate bonds, which may have a greater impact on the bonds' returns than inflation. There is no guarantee that the Fund's positions in inflation hedging instruments will reduce or completely eliminate inflation risk within the fund. LQDH: The Fund's use of derivatives may reduce the Fund's returns and/or increase volatility and subject the Fund to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. The Fund could suffer losses related to its derivative positions because of a possible lack of liquidity in the secondary market and as a result of unanticipated market movements, which losses are potentially unlimited. There can be no assurance that the Fund's hedging transactions will be effective. Investment in a fund of funds is subject to the risks and expenses of the underlying funds. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained. Diversification and asset allocation may not protect against market risk or loss of principal. Transactions in shares of ETFs will result in brokerage commissions and will generate tax consequences. All regulated investment companies are obliged to distribute portfolio gains to shareholders. The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”). This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This material is strictly for illustrative, educational, or informational purposes and is subject to change. The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Markit Indices Limited, nor does this company make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with Markit Indices Limited. ©2018 BlackRock. iSHARES and BLACKROCK are registered trademarks of BlackRock. All other marks are the property of their respective owners. ICR1118U-641651-2036906
Michael Batnick and Josh Brown of Ritholtz Wealth Management play their favorite game, What Are Your Thoughts – featuring special guest star Ben Carlson of A Wealth Of Common Sense and Animal Spirits fame. In this episode: * Michael picks his desert island news subscription * Which mean reversion is more likely to disappear – international stock outperformance or value vs growth? * Josh has a funny feeling so...
Itâs been a tough year for Chinese technology stocks. The fast-growing sector has led emerging market (EM) indexes down amid rising U.S.-China tensions. The upside: The decoupling of Chinese tech from U.S. peers is set to accelerate amid a struggle for tech dominance, giving it diversification benefits. And valuations have fallen.
Chinese tech stocks typically trade at a premium to developed market stocks or peers given their greater growth potential. But that premium (the blue line above) has come down sharply this year, while market attention to the U.S.-China relations risk, as measured by our BlackRock Geopolitical Risk Indicator (BGRI), has increased (the orange line). Our outlook for global technology stocks broadly is positive, and we believe the door may be open for global investors to diversify their exposure and step into a long-term opportunity in Chinese tech.
Reasons for optimism
Tech stocks are the largest constituent in both the U.S. and Chinese equity markets. Downward earnings revisions, stemming partly from regulatory changes affecting matters such as content dissemination and licensing, have weighed on sentiment for Chinese tech stocks in 2018. Analysts project a rebound in 2019 amid strong consumer demand, fiscal stimulus and waning regulatory hurdles. In addition, the U.S. and China tech sectors are increasingly different, creating distinct opportunities for investors.
The U.S. tech sector has a global bent versus Chinaâs domestic one. Concentration is greater in China, where just three stocks represent most of the tech market cap. Other distinctions: The Chinese market for tech services is larger, the Chinese consumer base has a different income profile and the regulatory framework in China is developing faster. We see changes in trade and the competition for tech dominance amplifying these differences and limiting co-development. Reduced IPOs and cross-border investment could be byproducts of ongoing tensions, yet we see Chinaâs focus on domestic demand and self-reliance as positives amid trade disputes. Cross-country investment restrictions could limit redundancy and direct competition, while rivalry-fueled innovation may benefit both tech sectors. A near-term uncertainty posing an upside or downside risk: a potential meeting between U.S.-China leaders later this month. Yet we see Chinese and U.S. tech decoupling even without worsening tensions, as China devotes capital to its innovation priorities.
Read more market insights in our weekly commentary.
The long-term potential in Chinese tech firms may be underappreciated amid strained U.S.-China relations. We advocate digging deeper than the index-dominating mega-cap names in China to uncover opportunities in smaller software and services firms. In the U.S., we favor software as a service (SaaS) firms, as companies large and small move their systems to the cloud. Valuation multiples in the U.S. tech sector have risen in the post-crisis period but are now in line with their five-year historical average, and they do not look particularly extended over a longer horizon. We maintain our favorable view of global tech stocks and advocate broadening exposure to capture the diverse opportunities in China and the U.S.