Where investors are putting their money

The Securities Exchange Commission (SEC) is considering shortening the settlement cycle for securities trades from 2 days to just 1 day. However, this change could create challenges and higher costs putting $1 trillion worth of ETFs at risk, according to a Bloomberg report.

While ETF share transactions could settle in 1 day under the proposed rule, it may take longer to settle all of the underlying assets held by the ETF. BlackRock’s Global Co-Head of Bond ETFs, Steve Laipply, believes speeding up settlement could prove “healthy for the ecosystem” over the long-term.

Watch the video above to find out where Laipply is seeing investors put money to work in the world of bond ETFs.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

JARED BLIKRE: The SEC taking aim at structural issues that were exposed during the meme stock mania of early 2021 by trying to have the settlement time of most securities trades. That would be to one day instead of two days or so-called T+12 now. Yet the change may cause more headaches and drive up costs, especially for $1 trillion of ETFs.

And this is according to Bloomberg. Because while the transactions for the shares of the ETF may settle in one day, it could still take two to five days for the transactions to complete for all of the underlying assets if they’re overseas and subject to different regulatory requirements. So, how should investors be thinking about the ETF space? As part of the ETF report brought to you by Invesco QQQ, let’s bring in now BlackRock Global Head of Bond ETFs Steven Laipply to discuss more.

Steve, glad to see you here. Just kind of break this down to us. There’s a lot of wonky stuff. But I guess my view is a few years ago before GameStop, we had already converted to two days from three days settlement, and now we’re going to one. Is the rest of the world going to catch up or is this going to be some kind of issue for ETFs as we’ve been talking about?

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STEVEN LAIPPLY: Hi, Jared. Thanks for having me. I don’t have a specific comment on this. It is something that we are keeping an eye on. Overall, we think long term, this will be healthy for the ecosystem. But we’re just watching right now.

RACHELLE AKUFFO: And of course, we’ve got to talk bond ETFs, especially given the action that we’ve seen in the market and some of the retreats that we’ve seen as well. When you look at some of the best performing bond ETFs, where can investors still get in? Where do you still see some upside to go?

STEVEN LAIPPLY: Well, what’s really interesting, if you look at the pattern of flows this year, it’s a little bit counterintuitive. Because you’ve seen the bulk of flows go into Treasury securities in the US. So, with our iShares franchise, we’ve seen about $50 billion come into treasuries despite the fact that yields have been rising.

Overall, we’ve taken in $64 billion. Ironically, one of the best performing sectors has actually been high yield, which is a sector that’s been in outflows most of the year. It’s returned roughly 7% year to date, and it’s yielding around 9%. We have started to see investors come back into high yield.

So just in the last month, I think we’ve seen over 3 billion come in to high yield through our ETFs. So investors are starting to turn in sentiment. I think a little bit of that has to do with views that the Fed might be coming to the end of its cycle. Where we’re seeing flows go otherwise, we continue to see flows into those buy-write products.

Those have now crossed over a billion inflows since inception. We’re seeing flows go into active ETFs as well. So that’s something new. Most fixed income ETFs have been indexed, where we’re starting to see investors turn to active ETFs such as BINC, which is the one we most recently launched in May.

JARED BLIKRE: I got to ask you about crypto here. There’s been a renewed interest in finally getting a spot. Bitcoin ETF of which BlackRock has submitted applications. I’m not asking you to comment on that one in particular. But just in general, how do you see the ETF industry gearing up for this eventual product that would come to market, which would be a spot bitcoin ETF?

STEVEN LAIPPLY: I think broadly, Jared, the industry is just evaluating what things should be in an ETF, if it can be done, what the proper structure is. This is just one manifestation of that. I think we as an industry, and BlackRock in particular, we want to innovate responsibly. So this is something that we’re continuing to monitor. And we’ll just see how we progress from here.

RACHELLE AKUFFO: And when you’re looking ahead, we’re staying in a higher for longer interest rate environment, a lot of people wondering, are bond ETFs the way to go? So in terms of some of the questions that your clients have, how are they viewing this potential time as we are waiting for eventual rate cuts somewhere potentially in 2024, but still not on the books at the moment?

STEVEN LAIPPLY: Yeah, I we do think bond ETFs are the way to go. We’ve seen despite the past two years of this incredibly historic tightening cycle, it’s created some of the most challenging bond markets on record. We’ve continued to see very, very robust flows into bond ETFs.

One way that investors have been able to navigate that has been through our iBonds franchise. So those are our bond ETFs that simply roll down and mature. That’s one way investors have pivoted.

We’ve seen about 7 billion go into that. However, to your point, Rachelle, once we see interest rates stabilize, or rather, more importantly, the market believes that they have finally stabilized and the Fed has reached the end of its cycle, we believe that there will be significant flows into fixed income and bond ETFs in particular as investors retool their portfolios. So, obviously, we can’t predict the economic environment, but investors are most likely to come out of cash and start extending into duration at least somewhat as they bolster their portfolios for a potential slowdown and as inflation continues to fall.

RACHELLE AKUFFO: Bonds continuing to be the rock star story so far this year. Appreciate you taking the time to join us. Thank you to BlackRock Global Co-Head of Bond ETFs Steve Laipply joining us as part of the ETF report brought to you by Invesco QQQ. Thank you so much.

STEVEN LAIPPLY: Thank you.