The Federal Reserve raised interest rates, albeit modestly, in December, representing the central bank’s only rate hike of 2016. Some fixed income market observers are betting the Fed will boost rates multiple times this year, prompting speculation about a rotation out of bonds into equities.
That does not mean investors should eschew bonds altogether. In fact, active management could be advantageous in the current fixed income environment.
Tthe SPDR DoubleLine Total Return Tactical ETF (NYSEArca: TOTL) has been a popular active bond play for ETF investors. TOTL is an actively managed ETF backed by bond guru Jeff Gundlach and is also seen as an ETF adaptation of the flagship DoubleLine Total Return Fund (DLTNX). DoubleLine and SSGA have also partnered up with the more recently launched SPDR DoubleLine Short Duration Total Return Tactical ETF (BATS: STOT) and SPDR DoubleLine Emerging Markets Fixed Income ETF (BATS: EMTL).
Bond investors who still want to hold onto fixed-income assets in a rising interest rate environment ahead may consider actively managed strategies that are able to quickly modify holdings to adjust to a changing environment.
TOTL provides a higher yield and lower duration than the benchmark Barclays U.S. Aggregate Bond Index, with a smaller standard deviation. Additionally, the active ETF has a greatly diminished exposure to U.S. Treasuries while over-weighting agency MBS, non-agency debt, emerging market bonds, bank loans and high-yield, among others.
“The advantage of an active fund like TOTL is that it has more flexibility in security selection and risk management capabilities than an index. The fund manager can increase or decrease the effective duration, as well as shift assets towards areas of the bond market they feel offer greater value. There are also limits (or guidelines) on sector exposure that make this fund suitable as a diversified core holding,” according to ETF Daily News.
The Barclays U.S. Aggregate Bond Index has been the go-to benchmark for many fixed-income investors. The benchmark tracks U.S. investment-grade corporate bonds, mortgage-backed securities and U.S. Treasuries. However, potential investors should note that the index excludes municipal bonds, Treasury inflation-protected securities and high-yield debt.
As the Federal Reserve looks to normalize interest rates, bond ETF investors have shown greater interest in actively managed options that could better adapt to the higher rates.
“Right now, TOTL yields 3.02% and has an effective duration of 5.02 years. It also carries exposure to bank loans, emerging market debt, and other asset backed securities that you won’t find in many benchmarks,” adds ETF Daily News.
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.