The impact of indexation is not limited to the equity market. It is at least as pronounced in the bond market. The largest fixed income ETFs trade such large amounts every day that it is easy to imagine many scenarios that could trigger an illiquidity event. The inclusion rules of the various indexes appear likely to exacerbate such an event rather than mitigate its impact. This is not a recipe for success.

In a different (and uncorrelated) part of the market, cryptocurrencies, the biggest being Bitcoin, represent an emerging and exciting asset class. Cryptocurrencies are not yet large enough to function as an asset class investable by institutions, but that time may be rapidly approaching. Though there are many unknowns regarding cryptocurrencies, this is an area we are following with great interest.

Highlighted securities: T-Mobile USA 6.375% Due 5/1/2025, Activision Blizzard 5.625% Due 9/15/2021, Nuveen High Income 2020 Target Term Fund (JHY), PIMCO Strategic Income Fund (RCS).

Download: Fixed Income Contrarian Compendium December 2015