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Positioning your barbell fixed income portfolio

Phalguni Soni

Why barbell bond portfolios can outperform when rates rise (Part 5 of 10)

(Continued from Part 4)

Positioning your barbell portfolio

As we explained earlier in this series, barbell portfolios take positions in short-term and long-term debt only, with little or no exposure to intermediate-term debt. While the definitions aren’t set in stone, debt maturing in five years or less is typically categorized as “short-term.” Intermediate tenors include debt with maturities ranging from five years to less than ten years. Long-term debt matures in ten years or more.

However, unlike a barbell, the weights needn’t be equally distributed on both ends. You can favor either the long or the short end, depending on your portfolio strategy. You can even choose your maturity—say, one to three years at the short end and 10 to 20 years at the long end. Alternatively, you could consider one to five years at the short end and 20 to 30 years at the long end.

Portfolio positioning will depend on your interest rate outlook. So it’s important to keep track of where rates are headed. As we mentioned earlier, this is an active strategy that requires periodic monitoring and reinvestment.

How to gain exposure to short- and long-term debt

You can achieve this exposure easily enough if you’re looking at a portfolio of US Treasuries. The U.S. Department of the Treasury holds periodic auctions for the sale of long-term and short-term debt that you can participate in. It’s more difficult to gain the same exposure to corporate bonds, whether high yield (JNK) or investment-grade (LQD).

The easiest way is to look at a portfolio of short-term and long-term fixed income ETFs. These will give you the desired exposure with low transaction costs. For example, the Vanguard Short-Term Bond ETF (BSV), the SPDR Barclays Capital Short Term High Yield Bond ETF (SJNK), and the iShares 1-3 Years Treasury Bond Fund (SHY) provide exposure to short-term debt. The iShares Floating Rate Bond (FLOT) provides exposure to short-term floating-rate notes that are rated investment-grade.

ETFs like the iShares 20+ Year Treasury Bond ETF (TLT) and the Vanguard Long-Term Corporate Bond Index Fund (VCLT) provide exposure to long-term debt.

Continue to Part 6

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