As investors consider ways to adapt to a changing interest rate environment, a new breed of smart beta fixed-income exchange traded fund strategies may help limit risks.
“We think this is particularly important for bond investors as they need to spot quality and value while keeping in mind the impact of interest rate risk and credit risk,” according to a BlackRock note.
Traditional bond ETFs may expose fixed-income investors to risks in a rising interest rate environment. For instance, many follow a market capitalization-weight methodology that would overweight the most indebted issuers. Furthermore, they target a specific range of maturities that could leave investors negatively exposed to changes in interest rates.
On the other hand, investors may consider smart beta bond ETFs to potentially deliver better performance than something benchmarked to the Bloomberg U.S. Aggregate Bond Index by accessing yield in a more balanced approach.