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 (NYSEArca: SHY), which has a 1.81 year duration and a 0.46% 30-day SEC yield, Schwab Short-Term U.S. Treasury ETF (NYSEArca: SCHO), which has a 1.9 year duration and a 0.56% 30-day SEC yield, and Vanguard Short-Term Government Bond ETF (NYSEArca: 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 (NYSEArca: CSJ) has a 1.98 year duration and a 1.11% 30-day SEC yield, Vanguard Short-Term Corporate Bond Index (NYSEArca: VCSH) has a 2.8 year duration and a 1.79% 30-day SEC yield, and SPDR Barclays Short Term Corporate Bond ETF (NYSEArca: 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 (NYSEArca: 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 (NYSEArca: 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 (NYSEArca: 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 (NYSEArca: SHM), which has a 2.8 year duration and a 0.91% 30-day SEC yield, Market Vectors-Short Municipal ETF (NYSEArca: 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 (NYSEArca: 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.
ETF investors can use the SPDR Barclays Convertible Securities ETF (NYSEArca: CWB) to gain exposure to convertible bonds. CWB has a 1.81% 30-day SEC yield. [As Rates Rise, Call on the Convertibles ETF]