While many anticipate a rising rate environment ahead, investors should not forgo fixed-income assets and bond exchange traded funds in a diversified portfolio.
“We are in a potential rising-interest-rate environment, and initially this will have a negative impact on bond and equity markets,” R. M. Zalatimo, managing director, National Securities Corp., said in a CNBC article. “If interest rates go up, your bond portfolios will drop in value and you will take a loss.”
Consequently, Zalatimo advises pre-retirees to cut down their bond portfolio duration to short-term positions of five to seven years. Others, like Herb White, president of Life Certain Wealth Strategies, even argues that investors should hold even shorter durations of one- to five-year positions.
Bond ETF investors can move down the yield curve with shorter duration bond funds. Duration is a measure of a bond fund’s sensitivity to changes in interest rates, so a shorter duration reflects a lower negative response to higher interest rate.
For example, short-term Treasury bond ETF options include the iShares 1-3 Year Treasury Bond ETF (SHY) , which has a 1.81 year duration and a 0.46% 30-day SEC yield, Schwab Short-Term U.S. Treasury ETF (SCHO) , which has a 1.9 year duration and a 0.56% 30-day SEC yield, and Vanguard Short-Term Government Bond ETF (VGSH) , which has a 1.9 year duration and a 0.57% 30-day SEC yield.
For short-term investment-grade corporate debt exposure, the iShares 1-3 Year Credit Bond ETF (CSJ) has a 1.98 year duration and a 1.11% 30-day SEC yield, Vanguard Short-Term Corporate Bond Index (VCSH) has a 2.8 year duration and a 1.79% 30-day SEC yield, and SPDR Barclays Short Term Corporate Bond ETF (SCPB) has a 2.04 year duration and a 1.44% 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 2.37 year duration and a 5.19% 30-day SEC yield, iShares 0-5 Year High Yield Corporate Bond ETF (SHYG) , which has a 2.4 year duration and a 4.74% 30-day SEC yield, and PIMCO 0-5 Year High Yield Corporate Bond Index (HYS) , which has a 1.92 year duration and a 4.24% 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 2.8 year duration and a 0.91% 30-day SEC yield, Market Vectors-Short Municipal ETF (SMB) , which has a 3.02 year duration and a 1.27% 30-day SEC yield, and iShares Short Term National AMT-Free Muni Bond ETF (SUB) , which has a 1.98 year duration and a 0.60% 30-day SEC yield.
Zalatimo also suggests convertible bonds, or corporate bonds taht can be converted into the issuing company’s common stock.