Financial advisors will have to better understand the market environment and how the Barclays Agg will be affected in the days ahead. Consequently, there is an opportunity to carve out areas that might be more exposed to upcoming risks, notably long-term Treasury exposure, Lydon said.
However, investors are not left out to dry. There are now a number of smart beta or alternative index-based ETF strategies and ETFs that access securities outside the range of traditional Barclays Agg exposure to help fixed-income investors limit risks and potentially enhance returns.
“You can diversify in other areas,” Lydon said. “There’s some smart beta strategies that have, in fact low, duration or even negative duration when you can diversify in certain areas. Going outside the U.S., emerging market bonds, for example, are very fairly priced but it will offer a great yield.”
As more smart beta grows in popularity, more investors and financial advisors are beginning to incorporate these alternative index-based ETF strategies into a diversified portfolio. These types of smart beta strategies often provide disciplined investment approaches that could limit short-term drawdowns and potentially enhance long-term returns.