Some fixed-income investors are looking at bond ETFs with shorter durations for cover if interest rates rise further. Bank loan ETFs also provide a cushion against higher rates.
“Bonds with longer durations — meaning they mature at a later date — tend to be more sensitive to interest-rate changes, making them more volatile in price than bonds with shorter durations,” writes Erin Arvedlund, a columnist for the Philadelphia Inquirer.
For rate protection, she points to short-duration bond ETFs such as Vanguard Short-Term Bond (BSV), Guggenheim Enhanced Short Duration Bond (GSY) and PIMCO Enhanced Short Maturity (MINT). [Ultra-Short-Duration Bond ETFs as a Cash Alternative]
These short-term bond ETFs have also been in the spotlight with money market mutual funds facing SEC reform measures. [Money Market Debate Puts Focus on Short-Duration ETFs]
However, Arvedlund points out that ETFs have fluctuating share prices, unlike money funds. [Investors Flock to Low-Duration ETFs for Rising Rate Protection]
“When comparing exchange-traded funds, look carefully at the management fees, whether there are any fee caps or waivers (which sometimes allow the fund company to charge the fee at a later date and recoup the money), what kind of dividend income it provides you, and any tax implications if you trade in and out of these ETFs frequently,” she writes. [Investors Buying High-Yield ETFs with Shorter Durations]
“If you want to avoid rising rates altogether, check out bank-loan funds. Investors fearful of rising rates are turning to the PowerShares Senior Loan ETF (BKLN). Senior loans are high-yield bonds with floating rates, which removes interest-rate risk altogether,” the columnist added. [Bank Loan ETFs: Active or Passive?]
Full disclosure: Tom Lydon’s clients own BSV.
The opinions and forecasts expressed herein are solely those of John Spence, 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.
- Erin Arvedlund