Active Bond ETFs Can Quickly Adapt to Rising Rate Risks


Fixed-income investors are beginning to shift gears ahead of the Federal Reserve’s interest rate hike.

Instead of relying on traditional strategies, investors may consider an actively managed bond exchange traded fund that can quickly adapt to changing conditions.

At the recent Inside Fixed Income 2016 conference in Newport Beach, California, ETF Trends had a chance to sit down with Jerome M. Schneider, Head of Short-Term Portfolio Management at PIMCO, to discuss the looming Federal Reserve interest rate changes and short-term bond ETF strategies that investors and financial advisors can use for capital preservation.

Specifically, Schneider pointed out that fixed-income investors are now exposed to greater rate risks and are getting paid less to shoulder that risk.


Looking at the Barclays U.S. Aggregate Index, the benchmark for popular broad index-based bond funds, investors are now overexposed to government debt, exposed to greater durations and receive lower yields. The iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG), for example, has seen its duration, or sensitivity to changes in interest rates, rise from 3.7 to 5.5 since the financial downturn while yields have declined 4.0% to below 2.0%. This is partly due to the Barclays U.S. Aggregate Index’s increased government bond exposure, with AGG including a 37.5% to U.S. Treasuries.