This article was originally published on ETFTrends.com.
Compared to stocks, bonds may not have its name in lights compared to their more popular capital markets brethren, but former hedge fund manager and television personality Jim Cramer says that good investing requires a solid understanding of the fixed-income market.
"Look, I know the bond market is boring, ... but it's much larger than the stock market, and more importantly, it's very important to the overall direction of stocks," the "Mad Money" said Cramer.
A CNBC article made mention of Cramer's time as a hedge fund manager when he would dial into into the office with the same question while away from his desk: "Where are the bonds?"
"That's how much it mattered to me on a day-to-day basis," said Cramer. "Yet stock market investors seemingly forget the bond market all the time. It's simple: if the bond market competition gets more attractive, the stock market gets less attractive; this is indeed a zero-sum game.
"For a long time, we had an ideal environment for stocks: low inflation and low interest rates. That's an incredibly benign backdrop and I don't want it to lull you into a false sense of security about the dangers of a big spike in rates. That's why you have to watch the bond market."
That being said, here are three fixed-income ETFs to watch that Cramer and would-be bond investors would not find boring.
1. ProShares High Yield—Interest Rate Hdgd (BATS: HYHG)
HYHG tracks the performance of the Citi High Yield (Treasury Rate-Hedged) Index and allocates 80% of its total assets in high-yield bonds and short positions in Treasury Securities in order hedge against rising rates. Because HYHG invests in high-yield bonds, there is credit risk associated with the higher yield since the fund invests in corporate issues that are less than investment-grade. By targeting a duration of zero, HYHG offers less interest rate sensitivity versus short-term bonds. According to Yahoo! Finance performance numbers, HYGH has been generating returns of 1.76% year-to-date, 3.12% the last 12 months and 3.07% the last three years.
2. iShares 0-5 Year High Yield Corp Bd ETF (SHYG)
SHYG seeks to track the investment results of the Markit iBoxx® USD Liquid High Yield 0-5 Index composed of U.S. dollar-denominated, high yield corporate bonds with maturities of less than five years--the shorter durations help to decrease exposure, helping to mitigate credit risk. SHYG invests at least 90% of its total assets in the component securities of the index, primarily high yield corporate debt, and may invest up to 10% of its assets in certain futures, options and swap contracts, cash and cash equivalents. SHYG has returned 1.13% year-to-date, 2.86% the last year and 4.14% the past three years based on Yahoo! performance numbers.
3. SPDR Blmbg Barclays Inv Grd Flt Rt ETF (FLRN)
FLRN seeks to provide investment results that correlate with the price and yield performance of the Bloomberg Barclays U.S. Dollar Floating Rate Note < 5 Years Index. Like SHYG, FLRN limits duration exposure with investments in debt securities with maturities that don't exceed five years. In addition, at least 80% of its assets will be allocated towards securities comprising the index, such as U.S. dollar-denominated, investment grade floating rate notes. The floating rate allows investors to capitalize on any short-term interest rate adjustments made by the Federal Reserve that are in accordance with their monetary policy. Furthermore, the investment-grade issuers will be less likely to default versus non-investment-grade. Based on Yahoo! performance numbers, FLRN has generated a 1.06% return year-to-date, 1.95% the past year and 1.42% within the last three years.
For more trends in the fixed-income ETF market, visit the Fixed Income Channel.
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