Fixed-income assets are making a comeback as investors turn to safer, more conservative plays in response to rising volatility in the equities market. Specifically, more people are turning to fixed-income exchange traded funds as their go-to investment vehicle.
During times of market volatility and increased risk aversion, investors typically dump riskier assets and shift over to defensive assets, which have pressured long-term bond yields and pushed up bond prices, reports Charlotte Moore for Financial Times.
“In moments of high risk aversion, fixed income managers should take on long-term duration risk to increase the overall return of the portfolio, by buying a 20-year US Treasury ETF,” Anthony Christodoulou, ETF consultant, said in the article.
Fixed-income ETFs are the best instrument for investors to capitalize on the shift in risk sentiment as these funds provide regular investors with targeted duration exposure. [Safe-Haven ETFs for Times of Turmoil]
For instance, the iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) provides exposure to long-term Treasuries while the iShares 1-3 Year Treasury Bond ETF (NYSEArca: SHY), iShares 3-7 Year Treasury Bond ETF (NYSEArca: IEI) and iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) offer targeted short- and medium-term exposure to Treasury bonds.
“The great thing about having a diverse range of fixed income ETFs is that an investor can really target whichever part of the yield curve they want,” Aleem Siddiqui, investment director at Close Asset Management, said in the article.
Investors can also quickly move in and out of fixed-income positions with ETFs, reacting to changing market conditions. Since the ETFs are traded like stocks on an exchange, the average retail investor is able to build a position faster and easier than in using the underlying fixed-income securities.
Additionally, due to their structure, ETFs come with very low fees.
“The cheapness and ease of use make ETFs a very appropriate tool for a multi-asset manager who wants to make money from a short-term tactical asset allocation,” Siu Kee Chan, senior investment manager at ING Investment Management, said in the article.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.