While fixed-income investors can go down the yield curve to short-duration bonds to hedge against rising rates, there is more than one way to skin a cat.
For instance, Mazza pointed to floating rate exposure to diminish rate risk. Floating rate notes adjust their coupon based on movements in short-term rates, or Libor, while normal fixed-rate bond coupons do not. Additionally, investors who want more income within a floating rate structure and are more tolerant of credit risk can also look at senior loans as well.
The SPDR Barclays Investment Grade Floating Rate ETF (NYSEArca: FLRN) tracks investment-grade quality corporate debt that adjusts or floats its interest rate in response to the rest of the market. The SPDR Blackstone/GSO Senior Loan ETF (NYSEArca: SRLN) also floats its rate but includes speculative-grade debt holdings.
FLRN has a duration of 0.13 years and a 0.65% 30-day SEC yield. SRLN adjusts its floating rate component every 30 days and has a 4.51% 30-day SEC yield.
Mazza suggests a fixed-income portfolio of these shorter duration bond ETFs would include something like 15% ITE, 17.5% SCPB, 17.5% ITR, 15% SJNK, 10% SRLN, 10% FLRN and 15% MBG. The resulting portfolio woudl produce a yield to worst of 2.6%, an average duration of 2.9% and a credit spread of 177 basis points.
Bill Ahmuty, V.P. of Fixed Income ETF Capital Markets & Institutional Sales at State Street Global Advisor, also pointed out that ETFs have helped investors track a more liquid fixed-income market.
“Since 2009, the size of the Fixed Income Mutual Fund Market has continued to grow, while the use of traditional Credit instruments has fallen,” Ahmuty said. “As investors continue to seek alternatives to traditional Credit instruments, the ETF Fixed Income Market may possess potential for growth.”
Financial advisors who are interested in learning more about fixed-income assets can listen to the webcast here on demand.