However, Mazza advises advisors to look beyond bond benchmarks like the Barclays Aggregate Bond Index to improve diversification from low correlations found in other bond categories. The benchmark leaves most investors heavy on U.S. Treasury bond exposure. Moreover, investors may be missing out opportunities in municipal bonds and Treasury inflation protected securities as the Aggregate Bond Index does not include either categories. Mazza pointed other options like U.S. convertible bonds with a -0.05 correlation to the Aggregate Bond Index, U.S. leveraged senior loans with a -0.02 correlation, U.S. 1-5 year floating rate notes with a 0.05 correlation, liquid high yield with a 0.21 correlation, and emerging market sovereign debt with a 0.56 correlation.
Investors can also tap into these debt markets through targeted bond ETF options, including the SPDR Barclays Convertible Securities ETF (NYSEArca: CWB), SPDR Blackstone/GSO Senior Loan ETF (NYSEArca: SRLN), SPDR Barclays Investment Grade Floating Rate (NYSEArca: FLRN), SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) and SPDR Barclays Emerging Markets Local Bond ETF (NYSEArca: EBND).
K. Sean Clark, Chief Investment Officer of Clark Capital Management Group, also mirrored Mazza’s sentiment that the changing bond environment could call for a broader set of fixed-income tools. For instance, Clark Capital Management recently trimmed its holdings of long-term and intermediate Treasury bonds after the run-up in favor of junk bond holdings, like JNK. JNK and the junk bond market have been under pressure and offer attractive valuations after the risk-off selling.
However, Tim Anderson, Chief Fixed Income Officer of the RiverFront Investment Group, warned of increased default risks in the speculative-grade debt market this year. Alternatively, Anderson believes intermediate corporate bond yields look attractive as spreads have significantly widened and negative interest rates overseas will push more foreign investors into investment-grade U.S. corporates.
ETF investors can look to the SPDR Barclays Intermediate Term Corporate Bond ETF (NYSEArca: ITR) for exposure to intermediate-term, investment-grade corporate debt.
Financial advisors who are interested in learning more about ETF strategists’ fixed-income strategies can listen to the webcast here on demand.