As the markets face a steepening yield curve ahead, fixed-income exchange traded fund investors should begin to position their portfolios accordingly and shift toward shorter-dated assets.
Many market observers anticipate the Federal Reserve will begin hiking interest rates as President-elect Donald Trump’s policies could promote growth or accelerate inflationary pressures.
“Trump’s planned income tax cuts could initially boost consumer spending, but might soon lead to a deterioration in the U.S. budget and rising rates,” according to BlackRock. “Similarly, plans to deport undocumented immigrants could cause labor shortages and rising wages over time. This might lift inflation, leading to a faster pace of rate increases.”
Consequently, BlackRock has argued for reducing exposure to U.S. duration – a measure of a bond fund’s sensitivity to changes in interest rates, with a focus on U.S. investment grade credit and municipal bonds.
“Given our expectation for continued steady U.S. economic growth and the strong demand for yield, we increased the fund’s U.S. IG credit exposure,” according to a BlackRock research note. “In municipals, we increased exposure to high-grade assets.”
Bond investors can also adapt to the changing market conditions with targeted ETF strategies that lean toward shorter duration securities. For instance, investors interested in short-term corporate bond exposure have a number of investment-grade bond ETF options available, including the iShares 1-3 Year Credit Bond ETF (NYSEArca: CSJ), Vanguard Short-Term Corporate Bond Index (NYSEArca: VCSH) and SPDR Barclays Short Term Corporate Bond ETF (NYSEArca: SCPB).
CSJ tracks short-term U.S. investment-grade credit, including corporate, sovereign, supranational, local authority and non-U.S. agency bonds with remaining maturities between one and three years. The ETF has a larger tilt toward the banking sector and consumer non-cyclical. The fund comes with a 1.48% 30-day SEC yield and a 1.90 year duration.
VCSH also tracks a portfolio of investment-grade corporate bonds with an average maturity of one to five years, with a larger tilt toward industrial and finance. The ETF has a 2.7 year average duration and a 1.97% 30-day SEC yield.
SCPB is comprised of investment-grade corporate debt that have a remaining maturity of one to three years. Sector weights also include large industrial and finance exposures. The ETF has a 1.68% 30-day SEC yield and a 1.82 year duration.
Additionally, there are a number of short-term, investment-grade municipal bond ETF options available. For example, the SPDR Nuveen Barclays Short Term Municipal Bond ETF (NYSEArca: SHM) has a 2.92 year duration and a 1.04% 30-day SEC yield. The VanEck Vectors-Short Municipal ETF (NYSEArca: SMB) has a 2.85 year duration and a 1.17% 30-day SEC yield. The iShares Short Term National AMT-Free Muni Bond ETF (NYSEArca: SUB) has a 1.89 year duration and a 0.84% 30-day SEC yield.
For more information on the fixed-income market, visit our bond ETFs category.