However, the analyst argues that funds with a lower duration and a greater exposure to corporate bonds would outperform the Aggregate Index in a rising interest rate environment when the economy is expanding.
“Treasuries and government-backed bonds have historically provided poorer risk-adjusted returns (as measured by the Sharpe ratio) than investment-grade corporate bonds of similar duration,” Boccellari added, pointing to the better returns of corporate investment-grade bonds over the trailing one-, three-, five-, 10- and 15-year periods. [Bond ETFs Still Provide Suitable Risk-Adjusted Returns]
Fixed-income investors can also manually adjust their bond exposure through ETFs. For instance, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) provides exposure to investment-grade quality corporate debt, and the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) both track high-yield corporate debt that offer better yield compensation for their interest-rate risk, compared to benchmark Treasuries. LQD has a 3.04% 30-day SEC yield, HYG has a 4.82% 30-day SEC yield and JNK has a 5.25% 30-day SEC yield. [Institutional Investors Jump On Cheaper Junk Bonds, ETFs]
However, those who are more concerned about the affect rising rates can have on fixed-income assets can also go down the corporate yield curve with short-duration ETFs. For instance, the Vanguard Short-Term Corporate Bond Index (NYSEArca: VCSH) has a 2.9 year average duration, SPDR Barclays Short Term High Yield Bond ETF (NYSEArca: SJNK) has a 2.24 year duration and iShares 0-5 Year High Yield Corporate Bond ETF (NYSEArca: SHYG) has a 2.25 year duration.
For more information on fixed-income funds, visit our bond ETFs category.
Max Chen contributed to this article.