This article was originally published on ETFTrends.com.
Despite the Twitter scolding from U.S. President Donald Trump, the capital markets are expecting the Federal Reserve to hike rates a fourth time for 2018. As such, fixed-income exchange-traded fund (ETF) investors should position their portfolios ahead of the key rate decision on Wednesday.
The last couple of months sent a signal to stock investors that due diligence is necessary when screening for quality U.S. equities that can be resilient during times of volatility, but it also put fixed-income investors on notice that the same strategy is necessary for the bond market. One emerging theme that rose out of the volatility was a need for more short duration exposure as external headwinds face fixed-income markets going forward.
The recent volatility in U.S. equities was made evident by investor flights to the bond market with the latest BlackRock Global ETP Landscape report showing that fixed income products received the majority of November’s exchanged-traded product (ETP) flows.
According to report, Global ETPs saw inflows of $56.5 billion in November, which represents its best month since January with a concentration in fixed income of 33 percent or $18.7 billion. Of that amount heading into fixed income, just over $9 billion was allocated towards U.S. Treasury funds.
Within the capital allocated towards U.S. Treasury funds, short maturity funds saw inflows of $7.5 billion. In fact, short maturity funds accounted for $11.3 billion across the board for all fixed income products.
With the uncertainty of further rate hikes in 2019, especially if Fed Chair Jerome Powell delivers a dovish press conference following the decision, here are three ETFs to consider of the short duration variety.
With the short-term rate adjustments being instituted by the Fed, investors can limit exposure to long-term debt issues and focus on maturity profiles. An example would be SPSB, which seeks to provide investment results that correspond to the performance of the Bloomberg Barclays U.S. 1-3 Year Corporate Bond Index.
SPSB invests at least 80 percent of its total assets in securities designed to measure the performance of the short-termed U.S. corporate bond market. Ideally, shorter-term bond issues with maturities of three to four years are ideal to minimize duration exposure should the bull market enter another correction phase.
VCSH tracks the performance of the Bloomberg Barclays U.S. 1-5 Year Corporate Bond Index–a market-weighted corporate bond index with a short-term dollar-weighted average maturity. In addition to VCSH allocating capital towards debt issues that are investment-grade, fixed-income investors will like the reduced exposure to duration with maturities between one and five years.
Another short-term bond ETF option is the iShares Short-Term Corporate Bond ETF (IGSB) , which seeks to track the investment results of an index composed of U.S. dollar-denominated investment-grade corporate bonds with remaining maturities between one and five years. IGSB provides investors with exposure to short-term U.S. investment grade corporate bonds.
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