ETF Edge - Rare opportunities emerging in bonds 1/21/26

Episode Date: January 21, 2026

Headlines have equity markets reeling… proving the worth of multi-asset strategies to survive the short-term. But, for the long-term, rare opportunities in bonds are opening up for the first time in a decade.       Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by InvescoQQQ. Let's rethink possibility. Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange-traded funds, you're in the right place. Every week we're bringing you compelling interviews, thoughtful market analysis, and breaking down what it all means for investors.

I'm your host, Dominic Chu. Multi-asset strategies are earning their keep these days, while the bond market specifically is seeing some rare opportunities start to open up. Here is my conversation with Jerome Schneider, the head of short-term portfolio management at PIMCO, along with Matt Bartolini, the global head of research strategists over at State Street Investment Management. And gentlemen, thank you both for being here right now. Let's start Jerome with you because it's an interesting time for bond investors right now. we've seen the 10-year note yield pretty much locked in a pretty tight range for the better part of three or four months now,

yet all of the geopolitical headlines as of late has caused a little bit of a breakout. What do you make of what's happening in the bond market right now vis-a-vis things like Greenland, vis-a-vis things like what's happening in Venezuela, and all of the other geopolitical catalysts that are at play? Yeah, it's great to be with you, Dom. And I think it's important for investor to contextualize some of the headlines. receiving versus the opportunities that we're observing. This opportunity set is interesting because one, we have to remember that growth remains relatively

resilient. In fact, surprisingly resilient from where we expected it to be only a year ago. And in that context at PIMCO, we're believing growth probably ends 2026 at about 2.5%. It's one of those things that even though we're facing what we would call a case-shaped economy, where there's people who are doing better than other people, the reality is that the economy is still chugging along at a pretty healthy pace. spurred on productivity, spurred on by capital expenditures within the technology sectors and beyond, and also spurred on by fiscal impulses which are going to be stimulated by some of the rebates given from the big, beautiful bill from last year. Put that all together and it creates a pretty fertile environment for

differentiation within fixed income. So when you accompany it with a starting point of where equities are, equity valuations, and even some spread products, we're at a pretty high conviction level, meaning relatively high risk with relatively low expected returns for many of those sectors for equities and beyond. And so from that perspective, where we look out at the fixed income landscape, not just in the U.S., but globally, opportunities present themselves not only in nominal returns, but also real inflation-adjusted returns, which could put investors in a compelling place where they could earn equity-like returns with a fixed-income allocation over the next several years.

It's a pretty interesting dynamic to have and something that we've, often looked for at PIMCO over the past decade, but we're only now seeing it come to come to fruition with such clarity. Now, Jerome, you've piqued my interest here, maybe that of our viewers and listeners as well. Where exactly are those opportunities then that you're looking at from a portfolio manager's perspective? What stands out to you right now? Yeah, we're clearly in a late cycle corporate credit environment, which transcends itself to

the risk, some of the risks we're seeing in the equity markets. But at the same time, when we think about the opportunity, that it's more global in nature. You have monetary policies. They're very divergent for the first time in almost a financial generation that you have rate cutting that might be more beneficial to certain jurisdictions like Australia and England

versus the United States. And obviously there's different dynamics going on in Japan. Those are important lessons for people to really adhere to when we think about opportunities in fixed income. It creates differentiation, relative value opportunities, that creates excess returns in that fixed income landscape. At the same time, when we just sort of look where we are in the yield space, yes, there's a lot of fear out there perhaps related to trade policies, geopolitical tensions,

but we're in that range that you alluded to. The 10-year note trading at 4.28% right now is still in that range of 3.75 to 4.5% that PIMCO's been talking about for a very long time. So from that perspective, that is the opportunity, the baseline to generate income, plus some opportunity for additional returns that allows you to have a total return that's probably in the 6 to 8% for most fixed income type of strategies that are diversified. And that's the compelling opportunity to have an equity like return in fixed income at this point in time. Equity like returns.

I mean, Matt, this is an environment right now where there have been some analysts and strategists who believe that the market is either very fairly or even overvalued at this point. Yet there are still opportunities out there right now amidst some of the near-term volatility in those equity markets. What exactly are you seeing from the State Street side of things as to where some investors are kind of moving some of that money around? What types of opportunities are presenting themselves on that equity side of the business? Yeah, I think within equities, when we look at it, you know, we think that growth is continuing to be positive. We think that you do have those fiscal impulses relative to the one big, beautiful bill act that might be coming online for the consumer and corporations in 2026, but also monetary policy, which we've had multiple easing from the Federal Reserve over the last 12 months,

and even more so over the last 18 months, we know that it typically takes around 18 months for all those policy actions to fully go into the broader economy, which that should support risk assets. So these fiscal and monetary impulses are beneficiary to risk assets like equities, but also that AI CAPEX cycle will also be beneficial for overall just spending levels in its own right. And I think one of the things that's interesting is that in sort of the first seven months of 2025, we saw investors completely rotate out of small cap equity. They had 20 billion of outflows in small cap equity ETFs.

However, following the one big beautiful bill act, but also the intention of the Fed to ease monetary policy, you started to see investors come back into small caps. They had inflows over the last months in 2025, about 13 billion or so. So even though small cap ETFs ended the year with next year. had outflows for the year. There is this resurgence of buying back into small caps that took place in the near end of 2025. And that coincided with small cap equities

outperforming large cap equities by about 13% since the end of July. And in the same token, this isn't just a sort of performance catch up. We've started to see earnings revisions move to the upside as well within small cap equities, where you now have double digit earnings growth forecasted for a full year 2026. And revisions are skewed to the upside.

So we think in this sort of macroeconomic backdrop, while there is some near term and maybe some more structural, just overall trade uncertainty and geopolitical uncertainty, the fundamental bias is positive for small caps. And they do have those twin forces of monetary and fiscal impulses coming online into 2026. That should support risk assets. You know, Matt, it seems like some of the stuff that you're talking about kind of echoes what Jerome had addressed in the bond market, that there is this expectation. that we will continue to see economic growth, both here and in certain jurisdictions abroad, and this idea that maybe inflation is still at play as well. You mentioned the small cap story. That's one that's more kind of levered toward the economic cyclicality story, right?

That if the economy is growing, that these smaller cap companies will participate. Are there other places within the markets that you are seeing right now, Matt, that maybe echo some of that sentiment or are evidence that we could be seeing kind of like this growth, reflation-ish-type trade or inflation-type trade as well. Matt? Yeah, so when we're looking at the fund flow patterns that we have seen, do you have me back now? I think we just lost you for a second, but yeah, did you get the question?

Are you? Yeah, around inflation and those inflation dynamics, what we do see playing out from investor positioning is you do see an upward bias relative to inflation-linked bonds, so sort of try to infuse some of that inflation bias into the overall bond portfolio. into commodity complex as well. Broad commodities have done quite well.

And from a flow perspective, they had their second most flows overall in 2025. From a sector perspective, we do see a bias towards cyclicals. So industrials are one of the areas of the marketplace that could potentially benefit from those same impulses we discussed around small caps, the growth formation, the capital expenditures,

but also some of the provisions within the one big beautiful bill act around R&D expensing, but also within industrials, the aerospace and defense industry, industry continues to sort of receive a bid higher as a result of new demand channels from this push towards self-sufficiency, not only from the U.S., but around the globe, as a result of some of the measures we've seen play out over the last 12 months under the new, the recent Trump administration as well. So irregardless of the $1.5 trillion spending that was forecasted by

the Trump administration in the U.S., the demand channel for defense spending is likely to be evidence on a global scale. And that's why you see industrials doing well, aerospace and defense stocks, not only just in the U.S., but in Europe as well, performing quite admirably as we go into 2026. Now, both of you have mentioned multiple asset classes with regard to some of your answers. You address things like bonds and stocks. You've even brought up maybe commodities and certain other assets out there as well. That to me screams kind of multi-asset, right? This multi-pronged approach, putting portfolios together that have allies. allocations to all these different kinds of groups of things. Jerome, I know that PIMCO, just in the last week, just last maybe Friday, I believe, has launched a new ETF product that has that kind of multi-asset approach. You mentioned before this pioneering of basically putting stocks together with bonds to seek outperformance. What exactly can you tell us about this new ETF product that blends both of them together in this ETF wrapper? And what do you hope to gain from that multi-strategy, multi-asset approach?

Yeah, I think one of the key facets that we're trying to amplify for most ETF investors right now is that there's structural opportunities in fixed income, which can be repeated and create alpha generating returns on a routine basis. And when you put that together with the opportunity set for investors who just want to be married to an ETR, to a equity-like index type of return, bringing them together creates a opportunity set that allows them to earn the equity beta, the equity returns in a static approach and at the same time benefit from the excess return possibilities that are in actively managed fixed income strategies. PIMCO's been doing this for almost 40 years. We call it Stocks Plus. And so with a launch of PEMCO's new active new stocks plus

active bond ETF, we're very excited that it comes to an ETF platform, which has a few different benefits than the traditional mutual fund approach. But more importantly, the approach now is that we're bringing active management in the bond space, which has routinely produced excess returns to those passive equity investors who may not necessarily realize that as a benefit. So over time, you'll hopefully benefit and outperform the S&P 500 in this new strategy as we bring that actively managed approach from our fixed income ETS into the world of passive equity investing through our SPLS ETF. Jerome, you're one of the portfolio managers of this SPLSETF.

What exactly are you hoping to gain in terms of that alpha or outperformance by marrying active fixed income strategies on top of a more passive S&P 500 strategy? What exactly can investors expect? I mean, we understand that past performance is not indicative of future performance necessarily, but what exactly would you expect to see in terms of having this married approach with passive equities and active bond in trading. We are taking a longstanding proven approach that we adopted here at PIMCO in 1986 with our stocks plus business.

What we're ultimately making available to clients is the ability to create repeatable avenues for alpha excess generation in the fixed income space, bringing that together with opportunity sets that are not necessarily as evident in actively managed equity, So just to put context around it, historically fixed income bond managers outperform their benchmarks by more than 90%. By contrast, only about 15% of active equity portfolio managers outperform their benchmarks. And so while you might have views like Matt does with regard to different sectors to rotate into, over the long term, it's clear that as an active fixed income manager, you can outperform indexes. And that's what we're putting together as the excess return generator,

combined with passive equity investing for the S&P 500. So if you look at the landscape today, sure, there's opportunities, there's concerns, there's high relative yields, high real yields as well. And those are opportunities that we see as repeatable ever since we launched our first ETF mint back in 2009 here at PEMCO. The theme PEMCO's ETS is actively managed ETS that benefit from structural opportunities, but also take advantage of the different macroeconomic landscapes that we found ourselves in over the past 15 plus years. And so we're bringing that franchise together with the passive equity landscape

and producing it for clients who might be interested in obtaining alpha potential in that fixed income landscape while maintaining their equity allocations within their broader portfolio. Matt is the multi-strategy approach, something that you guys are seeing more interest in over at State Street. You see a lot of ETF products in your suite of offerings. You see a lot of maybe index-oriented ones. That's kind of what people have grown accustomed to. with regard to State Street's ETF product suite. The multi-strategy approach, though, how much do investors,

either the end clients themselves or the investment advisors who are kind of managing their money, how much do they actually have to start looking at this multi-strategy approach? And will that be a big theme for the rest of 2026? I think it will be.

I think one of the things that we've had multiple conversations with more recently is about this idea of balance and resiliency. And within our lineup, a lot of our conversations lend towards our multi-asset strategy with Bridgewater with all W. And it's this idea of being balanced across different asset classes, being balanced from a geographical perspective across equities and bonds, but also different economic environments. I think in this type of macroeconomic landscape where things are drastically changing every

single day and every single headline, where the past 15 years are unlikely to be what we expect for the next 15 years, given this shift and this research, reworking of our macroeconomic paradigm where there are likely to be more upside biases risks towards inflation dynamics, given this sort of move towards self-sufficiency, which will likely increase deficits in fiscal spending. But also what we saw last year in 2025, 76% of non-U.S. equities outperformed the U.S. equity markets. So 76% of non-U.S. equity markets outperform U.S. equities. That's the largest hit rate since 2000. I think that's one data point to sort of illustrate that this is a different type of environment.

The other one is how gold had its best return since 1979 on the back of many different macro forces, one being the sort of the debasement trade and the move towards alternative fiat currencies. Commodities, they're going to, they've going through a significant move upwards as well. So I think this idea of blending assets together to have resilience against a wide range of economic outcomes from all the geopolitical risks is something I think in the very, should likely heed in 2026 because this is a new macroeconomic paradigm and the idea of balance and resiliency can be put put into play with something like a multi-asset strategy like we have with all W Matt if I could just follow up with that from a from a research strategist standpoint and point of view is there a place within that multi-strat universe where you think that there is not as much of an investor exposure to that there needs to be is there In other words, is there a catch-up, is there an allocation adjustment that needs to be made in certain parts of the market that you feel are under-exposed right now that need to be a little bit more brought up to, I guess, a fair exposure for anybody's portfolio.

Timeframes aside. I would just say real assets. I think if you look at it across the dynamics of where assets sit today, even with just look at the ETF market as a proxy, the majority of the assets sit in equities. And then, so I think it's roughly 80% is in equities, another 20%, or I say 15% is in fixed income, another 5% to that sort of hodgepodge area. But largely what we see in client portfolios are they are structurally underweight real assets, whether that is inflation-link bonds, gold, or commodities. And I think that is one area where a multi-asset strategy, you're not picking which asset

class will be the best-performing asset class. You're trying to own the risk premium out on offer across all different asset classes and try to move the needle towards areas that may be underrepresented in your portfolio. Because we see so many portfolios that are U.S. equity dominant or equity dominant. I think this is one way to infuse balance in sort of a one-stop shop type of approach. And Jerome, from your standpoint, from a portfolio manager standpoint, that works in fixed income, where do you think your portfolios, your clients are maybe a little bit more under-exposed to that you would look to kind of ramp up exposure in the coming months?

You know, people have gradually warmed the idea of fixed income over the past few years. And it's taken some time, admittedly, you know, the zero bound or the zero rates that we saw for a long time, you sort of said, you know, left people asking a question, why fixed income. Now, when we see ourselves producing returns for the past several years of, you know, six to eight percent, where income is part of one component, but capital appreciation and total return put you closer to those equity-like returns from a historical perspective, people are now looking to find better ways to diversify and frankly have a smoother ride. So we don't disagree necessarily with Matt's approach in terms of thinking about the opportunity set. We would instill

in their clients that they need to be mindful of diversification. They need to be mindful that we're in the late cycle of a credit-sensitive environment, but also we need to have ability to navigate and find opportunities given those degrees of freedom. And having an open mind, having degrees of freedom is part of that multifaceted approach that you'll find throughout PEMCO's active ETS strategies, no matter what the amount of interest rate exposure or where you want to find your opportunity set. So from that perspective, that's the compelling opportunity at this time is the ability to have the flexibility to navigate, and that gives you the opportunity to create repeatable structural opportunities to outperform baseline indexes, benchmarks,

even money market rates. And from that point of time, that appreciates, that appreciates, plus the income that's still relatively attractive, you know, makes this outlook pretty compelling at this point for 2026 and potentially beyond. And Jerome, a quick follow up there. Do you believe that the parts of the market are out there for maybe the opportunity and say high yield is a corporate investment grade? Is it emerging market debt? Is it on the short part of the yield curve?

Is it on the longer end of the yield curve? Then people want to take on duration. Where do you think that the opportunity really does lie in the coming months? I'm not going to say all the above. So I will tell you a few things. First of all, first thing to rationalize is how you manage your cash. Taking a step out of the traditional cash markets is still worth one to two percent more by looking in actively managed enhanced cash solution. Secondly, I think you have to look at it is globally. As I mentioned previously, there's monetary

policies which are moving in divergent directions around the world. The Central Bank of Canada is doing something different than the Bank of Japan. The Royal Bank of Australia is doing something than the Bank of England. We find ourselves in the relative value opportunity set as portfolio managers is exciting. Maybe not the average person watching the show has an appreciation for that excitement, but what we can do is find avenues to quantify those returns and those opportunity sets. So look at the world in a multifaceted relative value approach to drive returns. Third thing is not necessarily recognize that corporate credit is the only thing you can do in fixed income. There's other things. Securitized assets, agency mortgages are a great compliment that are still

attractive at these yield levels, at these spread levels, whereas we are in a late cycle of corporate credit environment in that regard. And then finally, make sure that you're taking an active approach to that fixed income landscape. Passive benchmarks don't necessarily afford you not only to accentuate the opportunities that you see, but it also doesn't necessarily steer you away from the things that you don't want to own. And that's really the biggest risk as we get into this part of the cycle with uncertainty percolating people's concerns about valuations, spreads, geopolitical, political risk, et cetera. But yet income remains a driving force here that remains pretty attractive for most people to consider as an alternative to the equity beta at this point

in time. Putting them together is what we're bringing together in the new ETF, SPLS here at Pemco. The coming months will be fascinating from a market's perspective for sure and a price perspective as well. Jerome Schneider and Matt Barlini, thank you both very much for being here on the show. Now it's time to round out the conversation with some thoughtful analysis and perspective to help you better understand ETFs with our Markets 102 portion of the podcast. Matt Bartolini, the global head of research strategist at State Street Investment Management, continues with us now. Matt, thanks for sticking around for the podcast. I want to kind of pick up on some of the points that we ended the ETF Edg Show with this time around, and that is this idea that there is a

multi-stratt kind of tailwind, if you will, for investment managers and the ETF market. where exactly do you think the alpha is going to come from specifically in those parts of the market in that multistrat world? Yeah, I think what's interesting is the term alpha, right? Outperformance of what? Like, you need that sort of reference benchmark. And I think when looking at the traditional portfolio of just stocks and bonds, you know, 60, 40, or even what we see from an asset allocation mix from our clients right now and looking at the broader ETF and mutual fund industry combined, it is very equity dominant.

And when you have very equity dominant type of portfolio, you're really going to inherit the boom bust of that one asset class. Even in a 6040 portfolio, 91% of the risk is generated by equities. So this idea of multi-asset or combining multiple strategies next to each other tries to perhaps improve upon that sort of traditional design by infusing more balance and resiliency. I think that's one of the big topics of conversation that we've been having is how do you try to mitigate the type of macro effects that are taking place on stocks and bonds from a growth and inflation perspective?

So that's why I think the idea of using a multi-asset approach where you're combining different assets together like commodities, gold, inflation-link bonds that have a different reaction function to growth and inflation dynamics than just your traditional stock and bond portfolio. I think that's where this idea of maybe craftsmanship alpha or portfolio construction alpha can come from. Not so much this alpha beating a sort of standard benchmark, but how do you have more balance and resiliency in this type of marketplace? What types of assets? You mentioned a slew of them just now. What types of assets do you think will drive some of that kind of portfolio construction

alpha, if you will? You mentioned the real assets during the show and whatnot that they're maybe under-exposed, with regard to certain types of investors. There are ETFs out there, I mean thousands of them at this point, and they all do different kinds of things. When you look at portfolio construction right now, how exactly would you use those ETFs in their various different forms to construct something that you think could make an outperformance type case for investors?

Yeah. So, I mean, again, we have a multi-asset strategy with our partners at Bridgewater with AllW. And we wrote an article that talked about how do you include all W alongside a standard 6040 portfolio to try to address some of those vulnerabilities of the 6040 portfolio and enhance biases towards inflation dynamics and growth dynamics that stocks and bonds don't have. And one way is just take a 10% allocation. I think that's just a sort of a common approach. Again, that article is out there for anyone that wants to read it. I think in looking at some of the steps that investors can take is understanding what they're, their geographical mix is.

If we look at just ETF assets, we just look at the ETF equity, AUM, 80% of that is within US equities. That's a very US equity dominant style portfolio. So one of the first steps to take is perhaps to just expand your geographical reach to outside US equities. So it's not so much going into these really

esoteric or alternative type of categories or even something as sort of common in the alt space of commodities. commodities, but maybe just trying to move a little bit away from your U.S. equity dominant position, not replace it, but just don't have that same 80% of your assets in that, again, using the broad market as a proxy. So I think that's just the natural first step is trying to have more geographical diversification. And that is one idea of balance.

And that idea of balance was on display in 2025 from those non-U.S. equity market returns. but also from the fact that this idea of balance across assets is really important, because in 2025, it was the first year since 2019 that stocks, bonds, commodities all outperform cash. And so that excess return to cash is a sense of alpha from departing from that liquidity of cash. Now, in recent years, we've labeled it because we try to label things and generalize and simplify as best we can, but we've called it American exceptionalism. We've called it America First.

There has been a reason why, because those assets, as you point out, have been such outperformers for such a long time. The recent headlines, though, have called into some question at least from certain professional parts of the market about whether or not that America first or America-centric trade still has legs going forward. There is a reason why many of those global type assets, XUS, did outperform in 2025. Do you feel as though that that kind of trend will continue, that it's not just one or two years in the making for this international exposure type argument, but that there is a more secular case to be made that the America First Trade is going to be diversified a little bit more away from. We know that the Treasury Secretary himself, Scott Besson, has kind of pushed back a little bit of some of the narratives out there in the market right now that, you know, people are going to sell U.S. assets like U.S. Treasury bonds and whatnot, and that's going to put pressure on the market. here. But what exactly is your take from a, from a strategist's perspective on just how much that trade may or may not have legs? Yeah. So this idea of selling U.S. assets, I don't see that as being the base case at all. I think one of the interesting aspects of this new macroeconomic

paradigm is that in the last 15 years, the U.S. equity market had spent the winningness trade that you could possibly have. And I think some of the factors that supported that, in terms of sizable global cooperation, sort of profit maximization, investing in the most profit maximizing way, your capital, that has somewhat changed a little bit. But we still have U.S. companies dominating from an exceptionalism perspective in terms of their earnings contribution to global equities. U.S. equities are at the forefront of the AI productivity miracle. I think this idea that you should all of a sudden sell your U.S. assets for, it's counter to what we've been discussing about having balance and resiliency.

You know, this AI productivity miracle, we don't know how it's going to unfold. We don't know who the ultimate winners and leaders are, but it is a central structural theme in the markets that's going to play out over the handful of years and decades. And right now, the U.S. is one of the leaders of that across many different companies. And they're not this sort of speculative type of makeup. They are contributing a significant amount of earnings contribution to U.S. equities and to global equities. They're funding their AI CAP-X largely through cash flow growth. So I think this idea of selling assets, again, runs counter to this idea of balance and diversification.

I think having something to the effect of 80% of your capital go to one specific country, that also runs counter to diversification and balance. I think as we look on the horizon, what investors should try to have is more more geographical balance. So that doesn't mean sell U.S. assets. It may perhaps maybe, instead of doing 80, 20, you do 75, 25, you do 70, 30 in that mix to try to give yourself some more diversification across different geographies because we aren't a new different macro paradigm where perhaps international equities, because now those local countries and policymakers are spending and having a fiscal impulse.

for self-sufficiency, for defense spending, to prop up their economies and offer up some growth. So I don't think that sell U.S. assets is a trade that is nothing more than probably a headline than an actual through line for portfolio construction. All right. And Matt, one final question before we let you go here. What do you think is going to be that big kind of outperforming asset class or geography or industry or sector? for 2026. Do you think there's a specific part of the market that you would look for some of that kind of outperformance to show up in the coming months? So we recently wrote our ETF outlook for

26 and there's two areas that I think are again underserved in terms of their allocation and portfolios today, one being small cap equities where they've had quite the catch-up trade outperforming large caps by about 13% since the end of July and they have some foundations to support further growth. The other one is emerging markets, and they are also related to that AI trade. Growth is above developed markets in the EM space, but also inflation is less of a concern that historically has been, and inflation is running below that of developed markets as well. So we think emerging markets is one area where investors could perhaps try to rebalance their portfolio, capture a little bit of a tailwind, but also that diversification from a geographical

balance perspective. All right. Matt Bartolini over at State Street. Thank you so much for joining us here on ETF Edge, the podcast. We appreciate it. Thank you. All right. Well, thanks for listening to the ETF Edge podcast. Join us again next week or just head over to etfedge.c.c.com.

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