When you hear about investing in exchange traded funds, you probably think mainly of stocks. But ETFs are increasingly used to invest in bonds — not just stocks.
The so-called "mother of ETFs" runs a company with a portfolio of fixed-income funds. Joanna Gallegos is the co-founder and chief operating officer of BondBloxx, a firm that specializes in Treasury and high-yield bond ETFs.
Gallegos started BondBloxx in 2021 after more than two decades as an ETF manager on Wall Street. She started with Barclays Global Investors, the firm that launched iShares before it was eventually bought by BlackRock. But then she moved to JPMorgan Asset Management.
Gallegos said that BondBloxx, which now has more than 20 employees, wants to be the "only dedicated provider in fixed-income ETFs."
Focusing On Bond ETFs
To that end, while many ETF companies have just a few options for Treasury ETFs (typically short-term, medium-term and long-term bonds), BondBloxx has eight. They range from a six-month duration — the BondBloxx Bloomberg Six Month Target Duration US Treasury ETF — to the BondBloxx Bloomberg Twenty Year Target Duration US Treasury ETF.
BondBloxx also offers numerous ETFs in the high-yield space, with sector-based funds for financial services, health care, industrials and four other sectors as well as broader-based funds that buy specific junk-bond investment grades: BB, B and CCC.
"We are really focused on this huge structural historic shift in fixed income. That is something we think all investors need to be paying more attention to," Gallegos told Investor's Business Daily. Gallegos added that some investors have become "intoxicated" with stocks for the past 20 years and have forgotten about bonds.
But with interest rates rising over the past few years as the Federal Reserve has tried to fight inflation, investors have suddenly come to the realization that bonds make sense for a long-term portfolio as well. This is a global phenomenon too, and BondBloxx has partnered with JPMorgan Chase on a U.S.-dollar-denominated, emerging-market bond ETF.
Bond ETF Pioneer Looks Ahead
IBD spoke to Gallegos about this. Here are her comments, edited for length.
IBD: How difficult is it to convince investors that fixed income can be an attractive and lucrative asset class? Is it an uphill battle talking about bonds in a world where a lot of individual investors are more interested in risky assets like stocks and crypto?
Joanna Gallegos: When you had a 0%-interest-rate environment, you'd look for return and you'd be taking on lots of different types of risks. Now that there's income back in fixed income, the difficulty is getting people to remember their Fixed Income 101 and the way fixed income traditionally and historically has always worked for them.
Income can be bigger over time and a bigger driver of their total return than just the bond price. You buy fixed income for a more conservative outcome in your portfolio and to diversify the equity risk. When interest rates were zero, you didn't have the one-two punch of fixed income.
Weighing Higher Rates
IBD: How much higher do you think interest rates, particularly long-term bond yields, will climb over the remainder of the year and through perhaps 2024?
Gallegos: Obviously rates are going to be higher for longer and that's not anything new to speculate on. We've been saying all year that you really just need to listen to the Fed and you really probably shouldn't be focused on the terminal rate so much as some of their objectives. I think people have gotten the terminal rate wrong many times this year.
We look at how the resilience of the consumer and corporate balance sheets are not showing softness in the economy yet. When people focus on how much higher rates are going to get they probably are asking two things.
One, they're probably saying, "I'm concerned that this is going to put more pressure on the economy." Corporations and consumers are going to have trouble paying their debts or financing their expansion because money costs more. And you should be thinking about if something's going to pivot really fast or not. I think the last two years have shown us that things aren't pivoting quickly back to lower rates. People are getting used to a different regime.
Is Inflation A Worry?
IBD: Is inflation still a bigger concern for the Fed and fixed-income market than worries about a potential economic slowdown or recession?
Gallegos: What kept happening in 2023 is the recession didn't come. Inflation stayed at high levels above the Fed target.
The confounding thing is that consumers are still strong and unemployment is still low. There's still money in the system, and that strengthens people's ability to weather through this inflation. So I think that's the thing to focus on. Inflation is slowly coming down and stabilizing.
We don't see a recession at the end of this year or even into 2024. We don't see distress or big credit-default events coming that quickly.
Offering Precision Bond ETF Tools
IBD: BondBloxx describes itself as "the first ETF issuer to focus solely on providing precision tools to help investors seize opportunities in fixed-income markets." How exactly does that work with regard to the types of ETFs BondBloxx offers?
Gallegos: ETFs grew really quickly in some aspects, but it grew really slowly in others. You can buy anything in equities and crypto. There are sectors, active strategies and so much choice. But oddly, the fixed-income product line was pretty constrained to broad-based bonds.
But the way that investors in fixed income actually trade bonds is a more precise way based on risk characteristics, like duration or credit spreads, and they cut it up more often than you would think. We recognized that the product development in fixed-income ETFs just wasn't finished and it wasn't being focused on the right part of the market.
So we started out with just taking broad-based exposures and offering people different cuts so that they could take advantage of the way different segments of fixed income are trading.
In high yield, for example, we have an energy ETF, and it has really interesting characteristics to it, because in 2022 energy prices went through the roof. And so, suddenly, the balance sheets of these energy companies are becoming really strong. So you're getting a lot of value as they were becoming stronger companies within these high yields.
The premise behind BondBloxx is that you should have choice in the same way that you do in equities.
Playing Bond Sectors
IBD: Where are investors most interested right now from a sector standpoint with regard to the high-yield bond ETFs?
Gallegos: I would say energy. There's an overweight trade there, and it has the best average credit ratings. (And) there's a strong outlook in terms of its pricing environment going forward. There's also potential for rising stars in that category — companies graduating into the lowest rung of high yield, which is double B .
It's hard to just extrapolate everything you know about an equity sector onto fixed income. But energy stands out because it's really well understood.
I think there's like a sweet spot across BB. Bond investors are really more into looking at ratings categories than individual sectors.
IBD: Where are investors putting money right now when it comes to Treasury ETF products?
Gallegos: It's so hard to ignore the short end of Treasuries. The lower-duration products are where people are coming into our product line the most, with yields just under 5%.
If you want to trade the spectrum of interest-rate risk, here are eight products that let you go from six months all the way to 20 years plus. So if you feel that you're ready to add duration, you can do it along the curve with our products. So that's why we designed the product set that way.
We have eight of them and not just a slug of short-, medium- and long-term products. You can be really precise.
BondBloxx Separates From The Pack
IBD: How do the offerings from BondBloxx differ from ETFs from bigger Wall Street firms that are well known for their fixed-income prowess?
Gallegos: Our experience in fixed-income ETFs goes back 20 years back at Barclays. So we're really experts in the fixed-income ETF space. We have grown with clients, with this market and ETFs in terms of exactly knowing how they're being used and the evolution of fixed-income ETFs.
Our focus is to really be listening to fixed-income practitioners. Investors need better exposure across ETFs and want diversification. It's important that there's more choice for clients to be out there.
We have a lot of investment experience in ETFs that deliver exactly the returns you're thinking they will. We're able to also partner with firms that want to work with us to develop other fixed-income strategies. We just launched an active ETF with Macquarie Asset Management. We're answering the need for more product in fixed income, more providers. I think we have a unique skill set that's been executed well so far.
How Gallegos Sees Her Firm's Role
IBD: You're often described as "the mother of ETFs." Talk about your experience working with the more traditional asset management firms?
Gallegos: I have only worked for two firms: Barclays Global Investors and JPMorgan. Barclays was bought by BlackRock and I wasn't there for very long.
The firms I worked with all had sort of an entrepreneurial, organic discipline. It was a big deal when Barclays Global Investors decided to enter into the retail space and did it in this really innovative way. And there were no roads back then. There was no product and no users and so everything had to be built brick by brick. JPMorgan and BGI were investing in somewhere that they hadn't been before.
