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 (NYSEArca: 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 (NasdaqGM: FTSL) or the SPDR Blackstone/GSO Senior Loan ETF (NYSEArca: 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 (NYSEArca: SJNK) and iShares 0-5 Year High Yield Corporate Bond ETF (NYSEArca: 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 (NYSEArca: 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.