This article was originally published on ETFTrends.com.
The sell-off in the fixed-income market and the higher yield environment may be an opportunity for bond exchange traded fund investors.
“I’m actually more excited going forward than I was in the last five years,” Fidelity Investments fund manager Jeff Moore told Bloomberg. “You may have a period where rising rates affect the prices, but over the course of one, two and three years these higher yields mean that investors can increase their bond market expectations.”
Moore argued that the sell-off in U.S. bonds has raise yields due within 10 years to levels at which investors can finally generate decent returns. Yields on benchmark 10-year Treasuries have crept up to 3% for the first time since 2014 last month.
Looking ahead, Moore contended that the market h as already priced in three more rate hikes out of the Federal Reserve for the coming year. Consequently, for yields to go up even further and weigh on the value of bonds even more, central banks would have to act even more aggressively, which Moore does not believe will happen.
“I don’t feel like they have to jawbone the market higher,” Moore said. “If anything, they feel more like price takers, they’re comfortable to raise rates if the market is going to price it in first.”
Actively Managed Bond ETFs
In a shifting environment, one may turn to actively managed bond ETFs backed by a seasoned team to adapt to market conditions.
For example, the actively managed Fidelity Total Bond ETF (FBND), Fidelity Limited Term Bond ETF (FLTB) and the Fidelity Corporate Bond ETF (FCOR) can help investors access tested fixed-income strategies to maintain quality and yield. FBND has a 5.64 eyar duration and a 3.29% 30-day SEC yield. FLTB has a 2.61 year duration and a 2.90% 30-day SEC yield. FCOR has a 6.83% 30-day SEC yield and a 3.80% 30-day SEC yield.
At Fidelity, the team emphasizes yield opportunities but focus on those quality debt exposures. While the active bond ETFs may include more high-yield corporate debt and lean toward higher risk credit, the active managers pick the best issuers and implement quality screens to pick out the best mix between yield and risk.
As investors look to rebalance their portfolios in a changing market environment, Sterne advised to look at the duration of holdings or the sensitivity to changes in interest rates on their fund portfolio. If investors are wary of rising rates, they can consider shorter duration bond funds, like FLTB, to limit rate risk.
For more information on the fixed-income market, visit our bond ETFs category.
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