Thanks to a 27.1% decline for 10-year Treasury yields, exchange traded funds holding U.S. government debt have been a star asset class in 2014.
Treasury ETFs have soundly outpaced popular asset classes such as equity-based ETFs and junk bond funds, but with the end of the Federal Reserve’s monetary easing regime, the time is now for investors to start evaluating ETFs for the next rate cycle.
On Tuesday’s webcast, Rethinking Fixed Income: Bond ETFs for the Next Cycle, State Street Global Advisors (SSgA) Research Strategist Matthew Bartolini, CFA and SSgA Portfolio Strategist Andrew Goodale will discuss specific ETFs that advisors and investors can use in preparation of what could be a “new look” Federal Reserve in 2015.
For example, some investors still do not know that convertible bonds, which can be easily and efficiently accessed via the SPDR Barclays Convertible Securities ETF (NYSEArca: CWB), are the top-performing fixed income asset class when U.S. interest rates rise.
SSgA Vice President and head of research Dave Mazza recently told ETF Trends in an interview that the swoon currently being endured by U.S. equities could being creating a buying opportunity in convertibles because “the converts market continues to be driven by the underlying equities and we expect equities to do regain their footing.”
Convertible bonds can be looked at as “best of both worlds” securities. Since the bonds can be converted into stock of the issuer, convertibles are often more intimately correlated to equities than other segments of the bond market. But like bonds, convertibles promise coupon payments and return of principal at a set date. [Convertibles ETF Looks Attractive]
Bartolini and Goode will also highlight the SPDR Barclays Short Term High Yield Bond ETF (NSYEArca: SJNK), one of the premier ETFs for rate-conscious advisors looking to stay invested in high-yield debt even if rates do rise.
The recent retrenchment in U.S. stocks has forced junk spreads higher, but it cannot be overlooked that Moody’s Investors Service has pointed out that default rates remain low, with 1.85% of U.S. junk-rated companies defaulting in the year ended Aug. 31, compared to 14.1% at the end of 2009. [A Shorter Road may be Better for Junk Bond ETFs]
Importantly, SJNK’s holdings are highly liquid on the secondary market and the ETF’s duration of just 2.5 years is well below that of traditional high-yield ETFs.
Speaking of low duration, Tuesday’s attendees to Tuesday’s webcast will also learn about the SPDR Barclays Short Term Corporate Bond ETF (NYSEArca: SCPB), which has a duration of less than 1.9 years.In terms of credit quality, SCPB truly is a high-grade option with over 57% of its 990 holdings carrying ratings of Aa or A.
Financial advisors who are interested in learning more about investing in a different of approaching bond ETFs can register for the Tuesday Oct. 21 webcast here.