After a three-decade long rally, traditional market capitalization-weight bond funds expose many to increased risks, especially in the upcoming rising rate environment.
Alternatively, bond investors can look to actively managed exchange traded funds that can potentially maximize the return potential and minimize risks along the way.
On the upcoming webcast, PIMCO’s Fixed Income Strategy for 2017, Jerome Schneider, Head of Short-Term Portfolio Management at PIMCO, will explain the potential risks traditional bond index fund investors face in a rising rate environment and look to alternative strategies that could better navigate the changing winds.
For instance, 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 has a short 2.02 year duration, so a 1% rise in interest rates would only translate to about a minimal 2.02% decline in the fund’s price, and it shows a 1.95% 30-day SEC yield. The ETF largely includes investment-grade debt, but potential investors should be aware that the active ETF includes a hefty 54.4% tilt toward investment-grade corporate debt, followed by 21.4% U.S. government debt, 4.5% mortgage and 4.6% high yield credit.
“LDUR benefits from the same time-tested investment process that underpins all of PIMCO’s actively managed investment strategies,” Scnheider said in a research note. “It combines our rigorously developed top-down outlook with our robust bottom-up security selection and risk management capabilities. All of these elements are key to identifying attractive risk/reward opportunities in today’s evolving market environment.”
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 0.28 year duration and a 1.28% 30-day SEC yield. The fund only includes investment-grade debt, but most of it is in investment-grade credit 64.8%, followed by mortgage 16.6%, other short-duration instruments 10.7 and emerging markets 3.4%.
“For investors willing to accept a degree of additional risk, we believe MINT provides a more attractive risk/return profile than traditional money market investments,” Schneider said in a separate note.
Financial advisors who are interested in learning more about fixed-income strategies for 2017 can register for the Thursday, December 8 webcast here.