In anticipation of rising interest rates, bond exchange traded fund investors can consider a branching out across fixed-income classes to help diversify their portfolios.
While rising rates are a negative for fixed-income assets, investors should not move entirely out of bonds, writes Scott E. Couto, president of Fidelity Financial Advisor Solutions, for InvestmentNews. Alternatively, Couto suggests looking at four fixed-income classes as a way to diversify and limit rate risk.
For starters, an investment portfolio should include high-quality bonds. For instance, the iShares Credit Bond ETF (NYSEArca: CFT) and the Vanguard Total Bond Market ETF (NYSEArca: BND) provide exposure to a diversified portfolio of investment grade corporate, sovereign, local authority and non-U.S. agency bonds.
“Advisers can help investors focus on the role bonds play in a diversified portfolio – income, total return potential, and an offset to equity volatility,” Couto said in the article. “Anchoring your client’s portfolio with high-quality bonds may be an appropriate strategy. Historically, high-quality bonds have performed well when stocks have declined and typically have provided steady income.”
Investors can also venture into alternative, non-core income options in search of yields and diversify a fixed-income portfolio. Alternative strategies include high-yield, floating rate, emerging markets or real estate. The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) andSPDR Barclays High Yield Bond ETF (NYSEArca: JNK), are the two largest junk-bond related ETFs.
The iShares Floating Rate Bond ETF (NYSEArca: FLOT) tracks notes that have a reset period with interest rates tied to a benchmark, such as the Fed funds, LIBOR, prime rate or U.S. Treasury bill rate. The iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) and PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY) provide exposure to U.S. dollar-denominated emerging market debt. The Vanguard REIT ETF (NYSEArca: VNQ) follows real estate investment trusts, which can help diminish portfolio volatility. [Alternative Asset ETFs]