Fixed-income investors are searching far and wide to adapt their portfolios to a rising rate environment. One option that merits consideration is a little known actively managed bond exchange traded fund strategy that has been quietly outperforming.
In the two-year period since the ETF’s inception on February 26, 2015, the iShares Edge U.S. Fixed Income Balanced Risk ETF (BATS: FIBR) has returned 5.35%. In contrast, the iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG), which tries to reflect the performance of the widely observed Bloomberg Barclays U.S. Aggregate Bond Index, gained 2.31% over the same two-year period.
The actively managed FIBR has increased 4.4% over the past year and was up 0.8% year-to-date. In contrast, AGG is 0.7% higher over the past year and gained 0.7% year-to-date.
The iShares Edge U.S. Fixed Income Balanced Risk ETF seeks to balance interest rate risk and credit risk, the two primary drivers of bond returns. Additionally, the active ETF also helps address investors’ need for income and their concern about rising rate risks ahead.
FIBR will invest the majority of assets in U.S. dollar-denominated investment-grade and high-yield fixed-income securities of varying maturities, including U.S. dollar-denominated securities of foreign issuers, U.S. Treasuries, privately-issued securities, and mortgage-backed securities (MBS). The fund may also invest in other ETFs (including other iShares funds), short-term paper, cash and cash equivalents.
For those worried about rate risk, the ETF may also adjust holdings to achieve a target credit spread risk and interest rate risk for the portfolio. For instance, the fund can take short or long positions in U.S. Treasury futures and short positions in U.S. Treasury securities through interest rate swaps, along with other interest rate futures contracts, like Eurodollar and Federal Funds futures.
BlackRock expects the Federal Reserve to embark on interest rate normalization but at a lower pace than in the past.
“The Federal Reserve’s (Fed’s) rate hike earlier this month marks a departure from the glacial pace of tightening in the past two years. By raising rates three months after the December 2016 hike, the central bank introduces the prospect of a more ‘normal’ pace of rate rises, albeit one that is likely less rapid than in the past,” Jeffrey Rosenberg, BlackRock Chief Investment Strategist for Fixed Income, said in a note.
For more information on the fixed-income space, visit our bond ETFs category.