- Fixed-income ETF investors may want to favor riskier plays
- Investment-grade corporate bonds, high-yield debt and bank loans may boost returns while offering less volatility than stocks
- Bond investors interested in riskier investments with the promise of higher yields can turn to speculative-grade or junk bond ETFs
With all the doom-and-gloom dissipating and the market rebounding, fixed-income exchange traded fund investors may want to ditch their safe-haven bets in favor of more riskier plays.
Pacific Investment Management Co. has advised investors to move out of the safety of government debt and into corporate credit since the U.S. will likely dodge a recession, report Susanne Walker Barton and Wes Goodman for Bloomberg.
“PIMCO’s belief that the U.S. economy will avoid recession this year bolsters our view that it’s time to move into credit,” Mark Kiesel, chief investment officer for global credit at PIMCO, said. “Credit, in our opinion, is in the ‘sweet spot’ intermediate zone between lower-risk sovereign assets, which tend to outperform leading into recession, and higher-risk assets such as equities.”
Specifically, Kiesel pointed to investment-grade corporate bonds, high-yield debt and bank loans, which may boost returns while offering less volatility than stocks.
Moreover, Kiesel argues that the relatively high interest rates in the U.S., compared to the rest of the developed world, will help increase demand from foreign investors for U.S. assets.
Mark Notkin, who manages the Fidelity Capital & Income Fund, also expects high-yield debt to further strengthen and believes the rising default fears have been overblown, reports Charles Stein for Bloomberg.
“We talk to hundreds of companies and nothing we were hearing led us to believe we were going to have a recession,” Notkin told Bloomberg. “Things aren’t terrific but the fundamentals are OK.”
Fixed-income ETF investors who are seeking to shift into riskier debt opportunities have a number of options to choose from. For instance, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD), Vanguard Intermediate-Term Corporate Bond ETF (NYSEArca: VCIT), SPDR Barclays Intermediate Term Corporate Bond ETF (NYSEArca: ITR) and PIMCO Investment Grade Corporate Bond Index ETF (NYSEArca: CORP) provide access to a broad diversified grouping of investment-grade corporate debt.
Bond investors interested in riskier investments with the promise of higher yields can turn to speculative-grade or junk bond ETFs like the PIMCO 0-5 Year High Yield Corporate Bond Index (NYSEArca: HYS), PowerShares Fundamental High Yield Corporate Bond ETF (NYSEArca: PHB), SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) and iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG).
Additionally, there are a handful of high-yield, senior bank loan-related ETF options, including the passive index-based PowerShares Senior Loan Portfolio (NYSEArca: BKLN) and Highland/iBoxx Senior Loan ETF (NYSEArca: SNLN). There are also two actively managed options, including the SPDR Blackstone/GSO Senior Loan ETF (NYSEArca: SRLN) and First Trust Senior Loan ETF (NasdaqGM: FTSL).
Since the senior loans have rates that adjust periodically, the floating-rate loans offer investors an alternative method of earning yields with little or no interest-rate risk. Due to their floating rate component, bank loans are seen as an attractive alternative to traditional corporate bonds in a rising rate environment.