Fixed-income investors that track traditional benchmark indices may leave fixed-income overexposed to certain risks. Alternatively, there are a number of active bond exchange traded fund strategies that may provide more diversified exposure in a shifting market environment.
Traditional market capitalization weighted bond indices are weighted by a a company or country’s total tradable bonds, which means that the more indebted borrower has a greater weight in the benchmark index, reports Robin Wigglesworth for the Financial Times.
For instance, the U.S., Italy and Japan make up over half ot eh entire $42.5 trillion universe of the Barclays Global Aggregate Index, the widely observed international bond gauge. Meanwhile, Brazil, Russia, India and China only make up 1% of the index.
Looking at the U.S., Treasuries and agency bonds make up almost 70% of the Barclays US Aggregate Index. The Vanguard Total Bond Market ETF (NYSEArca: BND), which follows the Barclays U.S. Aggregate Float Adjusted Index, includes Treasuries as the largest portion of the index at 44.8%, followed by industrials 16.8%, government mortgage-backed securities 16.5% and finance 9.1%.
“Being anchored to a benchmark heavily allocated to sectors where real yields are dangerously close to becoming negative has forced investors to reassess the traditional, benchmark-driven approach to core fixed-income management,” Guggenheim Partners said in a recent research note.
Consequently, concerns over the impact benchmarks have on bond investments have pushed many investors to alternative investment styles, such as “total return” or “unconstrained” – active bond strategies that are not constrained by traditional indexing methodologies and adapt to changes in the interest rate environment.
For instance, more flexible bond ETF options include the PIMCO Total Return ETF (NYSEArca: BOND), an ETF version of PIMCO’s flagship Total Return Fund (PTTRX), which holds U.S. government debt 20.4%, mortgage 30.3%, investment-grade corporate debt 18.7%, high-yield bonds 6.2% and emerging market debt 15.4%.
Additionally, the SPDR DoubleLine Total Return Tactical ETF (NYSEArca: TOTL), an actively managed ETF that offers investors access to the investment process at Gundlach’s DoubleLine Capital, holds 54.4% mortgage-backed securities, 10.0% emerging market bonds, 9.4% bank loans, 7.1% commercial mortgage backed securities, 6.6% high-yield debt, 6.4% investment-grade corporate debt and 5.3% Treasuries.
The relatively new WisdomTree Western Asset Unconstrained Bond Fund (NasdaqGS: UBND) seeks high level of total return through both income and capital appreciation through an array of bond securities, including U.S. Treasuries, mortgage-backed securities, corporate bonds and foreign sovereign debt, among other bonds. [A New Bond ETF With no Constraints]
The recently launched Newfleet Multi-Sector Unconstrained Bond ETF (NYSEArca: NFLT), which began trading on August 10, also tries to provide high current income and capital appreciation. [Newfleet Enters the Fray with Unconstrained Bond ETF]
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.