ETF Trends
ETF Trends


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.

On the other hand, Schneider argued that fixed-income investor can protect against the potential upcoming rate-induced volatility through short duration actively managed bond funds, such as the PIMCO Low Duration Active ETF, (NYSEArca: LDUR) and the PIMCO Enhanced Short Maturity Active ETF (NYSEArca: MINT).

LDUR comes with a short 1.4 year duration, so a 1% rise in interest rates would only translate to about a minimal 1.4% decline in the fund’s price, and it shows a 1.56% 30-day SEC yield. The ETF largely includes investment-grade debt, but potential investors should be aware that the active ETF includes a hefty 52.7% tilt toward investment-grade corporate debt, followed by 24.9% U.S. government debt, 7.7% other short term duration instruments, 4.6% mortgage and 4.0% high yield credit.

Additionally, MINT is meant to be used as an incremental step outside of the money market funds. Investors would use the active ETF for capital preservation or to take a defensive view on the market. MINT shows a 0.3 year duration and a 1.21% 30-day SEC yield. The fund only includes investment-grade debt, but most of it is in investment-grade credit 67.4%, followed by mortgage 15.3%, other short-duration instruments 10.0 and emerging markets 2.8%.

For more information on the fixed-income market, visit our bond ETFs category.

2016-11-07_1248Source: PIMCO

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.