With the Fed set on easing back the monetary throttle, investors are beginning to realize the negative effects of a rising rate environment. Nevertheless, there are a number of alternative fixed-income exchange traded fund strategies to help diversify your bond portfolio.
At the ETF Virtual Summit on January 15, the featured panel on “Creative Income Strategies in a Rising Rate Environment,” which include experts from CNBC, First Trust Portfolios, Guggenheim Investments and Peritus Asset Management, will focus on alternative fixed-income strategies that help advisors navigate shifting rates.
For example, over the past year, investors have shifted into senior floating rate bank loans as a way to hedge against rate risk. The PowerShares Senior Loan Portfolio (BKLN) saw almost $5 billion in new asset inflows over 2013. Senior loan ETFs include a floating rate component, which have extremely short “reset periods,” making senior loans a popular instrument when interest rates are expected to rise. Investors can also choose from actively managed options like the First Trust Senior Loan Fund (FTSL) or the SPDR Blackstone/GSO Senior Loan ETF (SRLN) . [Bank Loan ETFs Continue to Thrive]
The short-duration theme has also been popular outside of senior loans. Investors can shift down bond ETF duration exposure as a way to limit the negative effects of rising rates – duration is a measure of a bond fund’s sensitivity to changes in interest rates, and a lower duration typically translates to a smaller hit in the event rates should rise.
Additionally, high-yield corporate bonds have garnered greater interest as investors play the improving economy and utilize the higher yields to help cushion the blow from rising rates – bond prices and yields have an inverse relationship, so rising rates corresponds with lower bond prices.
The recently launched SPDR Barclays Short Term High Yield Bond ETF (SJNK) and iShares 0-5 Year High Yield Corporate Bond ETF (SHYG) help provide investors with a high-yield option but helps limit rate risk with a shorter duration. Both ETFs have a duration of about 2.1 years. SJNK has a 3.43% 30-day SEC yield and SJNK has a 3.78% 30-day SEC yield.
The actively managed AdvisorShares Peritus High Yield ETF (HYLD) provides a 8.24% 30-day SEC yield and the fund has a duration of 2.89 years. [AdvisorShares High Yield ETF Lands 5-Star Rating From Morningstar]
More over, target-maturity ETFs are receiving more attention as the funds only hold bonds that mature in a set year and distribute cash back to investors upon maturity. With target-maturity bond ETFs, advisors can implement a type of bond ladder strategy that has evenly spaced out maturity dates to help minimize interest rate risk. For example, Guggenheim provides a suite of BulletShares Corporate and High-Yield Corporate Bond ETFs with target-dates ranging between 2014 to 2022. [ETFs Help Investors Navigate Changing Fixed-Income Landscape]
Financial advisors interested in attending the annual virtual summit on January 15 can register at ETF Virtual Summit registration.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. 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.