An ETF with Equal Exposure to Interest Rate Risk and Credit Risk
How to Balance Your Approach to Bonds
To this end, we recently introduced the iShares US Fixed Income Balanced Risk ETF (INC). The fund strives to maintain an equal amount of interest rate risk and credit risk, which may provide higher risk-adjusted returns. Relative to a commonly used core fixed income fund like the iShares Core US Aggregate fund (AGG), INC has less interest rate risk and more credit risk. This results in INC having a potential higher yield, but that yield is compensation for having more credit risk. It also means that INC has less interest rate risk than AGG, and may be less impacted by a rise in rates. INC aims to balance the credit risk with the interest rate risk in the portfolio.
Market Realist – INC gives you equal exposure to interest rate and credit risk.
Today’s low yield environment suggests investors should consider less traditional approaches. As we saw in the previous part of this series, it is important to have a good mix of interest rate risk and credit risk in your portfolio. The iShares US Fixed Income Balanced Risk ETF (INC) gives you equal exposure to both risks, unlike the iShares Core US Aggregate Fund (AGG), which is mainly focused on investment-grade bonds in the US.
INC is actively managed and does not seek to replicate the performance of a specified index. INC has a lot of exposure to short-dated and intermediate-dated bonds, with the majority of the bonds having a maturity between zero to ten years. Also, the ETF has only 1% exposure to US Treasuries (GOVT) and a large exposure to corporate bonds (LQD) including some exposure to high yield bonds (JNK)(HYG) and asset-backed securities. The fund also uses Treasury futures contracts to manage the overall interest rate risk of the portfolio.
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