Short-Duration Bond ETFs to Mitigate Potential Volatility
Due to ongoing uncertainty over the Federal Reserve’s interest rate outlook, fixed-income investors should stick to short-term bond exchange traded funds.
Because of the potential volatility, “investors should be flexible and consider more liquid securities. Fixed income with shorter maturities is one starting place,” Bill Gross told Reuters.
Specifically, Gross, who left PIMCO to manage fixed income strategies at Janus Capital Group, argues that the Fed could hold off on interest rate hikes until late this year if at all as global growth remains sluggish and inflation remains low.
“With the dollar strengthening and oil prices declining, it is hard to see even the Fed raising short rates until late in 2015, if at all,” Gross argued. [Inflation Is Not Traveling in the Right Direction]
Consequently, due to the potential uncertainty, Gross suggests sticking to short-duration bonds to mitigate any volatility.
ETF investors can also manage risk exposure by shifting down the yield curve. For instance, short-term Treasury bond ETF options include the iShares 1-3 Year Treasury Bond ETF (SHY) , which has a 1.93 year duration and a 0.51% 30-day SEC yield, Schwab Short-Term U.S. Treasury ETF (SCHO) , which has a 1.93 year duration and a 0.37% 30-day SEC yield, and Vanguard Short-Term Government Bond ETF (VGSH) , which has a 1.9 year duration and a 0.53% 30-day SEC yield.
For short-term investment-grade corporate debt exposure, the iShares 1-3 Year Credit Bond ETF (CSJ) has a 1.85 year duration and a 1.09% 30-day SEC yield, Vanguard Short-Term Corporate Bond Index (VCSH) has a 2.8 duration and a 1.72% 30-day SEC yield, and SPDR Barclays Short Term Corporate Bond ETF (SCPB) has a 1.88 year duration and a 1.34% 30-day SEC yield.
Investors can also track short-term high-yield corporate bonds through the SPDR Barclays Short Term High Yield Bond ETF (SJNK) , which has a 2.45 year duration and a 5.98% 30-day SEC yield, iShares 0-5 Year High Yield Corporate Bond ETF (SHYG) , which has a 2.41 year duration and a 5.62% 30-day SEC yield, and PIMCO 0-5 Year High Yield Corporate Bond Index (HYS) , which has a 1.97 year duration and a 4.87% 30-day SEC yield.
Additionally, there are a number of short-term municipal bond ETFs available, including the SPDR Nuveen Barclays Short Term Municipal Bond ETF (SHM) , which has a 2.92 year duration and a 0.7% 30-day SEC yield, Market Vectors-Short Municipal ETF (SMB) , which has a 3.13 year duration and a 1.0% 30-day SEC yield, and iShares Short Term National AMT-Free Muni Bond ETF (SUB) , which has a 2.03 year duration and a 0.42% 30-day SEC yield.
The yield and bond’s price have an inverse relationship, so bond funds with long durations would experience large price drops if rates were to rise. In contrast, short-duration bond funds will experience more muted volatility in case of sudden rate changes.
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
