Given the changes in oil prices and the impact we are seeing in the corporate bond market, some investors may be wondering how to best manage their portfolio in this environment. One option is to manage energy exposure by using sector-specific funds to either dial up or down exposure to energy companies. iShares® offers a suite of sector funds that give investors the ability to make a sector play in these types of situations. Here is a summary of the funds and their exposures.
Given this tool kit, here are three strategies you may want to consider:
- Avoid energy entirely. If you want to completely avoid the energy sector, you could consider the iShares Financials Bond ETF (MONY) or the iShares Utilities Bond ETF (AMPS), which only give you exposure to the financial and utilities sectors, respectively.
- Reduce energy exposure. If you want to reduce your overall exposure to the energy sector, you could think about overweighting the financial and utilities sectors using MONY and AMPS along with your core investment grade portfolio. For example, a core portfolio consisting of just the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) would have 11% exposure to energy companies. A portfolio with 44% LQD, 28% MONY, and 28% AMPS would reduce that exposure by more than half, allowing you to have access to the other sectors in industrials while reducing your overall energy exposure.
- Take advantage of lower oil prices. The energy sector has priced in some of the impact of oil, and energy company bond prices have fallen. But if oil were to rebound these same bonds could rally. For investors who want to position for such a potential move, consider the iShares Industrials Bond ETF (ENGN) which currently has a 17% exposure to energy, the highest level of the investment grade credit funds.
There are likely a number of twists and turns in the road ahead for the oil market. Depending on how you think things will play out, sector-specific funds give you the flexibility to manage your portfolio exposures at a more granular level.
Matthew Tucker, CFA, is the iShares Head of Fixed Income Strategy and a regular contributor to The Blog. You can find more of his posts here.