An Active Bond ETF Strategy to Navigate Fixed Income Hurdles

Fixed income investors should consider the benefits of actively managed strategies given the current interest rate outlook.

In the recent webcast, Need Better Bonds? The Case for Active Management, Kenneth Herold, Senior Vice President and Director of the Investment Strategies Group, Natixis Investment Managers; and Christopher T. Harms, Vice President and Portfolio Manager, Loomis, Sayles & Company, outlined the low interest rate environment where investors are finding it difficult to balance yield generation and rate risk exposure.

“We believe the global economy will continue transitioning towards the Expansion phase of the cycle over the course of 2021. The recovery since the onset of the pandemic last year has been rapid compared to previous cycles, helped along by aggressive monetary and fiscal policy,” Harms said.

Consequently, economic growth projections have been upwardly revised through Q1, and we are currently expecting around 6.5% for 2021 and 4.1% for 2021. While variants pose some risks, the pace of vaccination provides reason for encouragement. Services data has been improving, and should continue to pick-up as re-opening continues through the spring and summer.

Looking at the world stage, Harms anticipates global growth to be strong in 2021 overall. However, ex-U.S. will likely lag in the near-term given the slow vaccine roll-out in Europe and emerging markets. Loomis Sayles expects more synchronized growth as we move through the year, with the potential for a global boom as the rest of the world to catches up toward the end of the year.

Meanwhile, inflation prints will likely be high in the near-term due largely to heavy base effects. Inflation could continue to trend upward even after base effects wear off given the strong cyclical upturn, but Loomis Sayles does not believe it will persistently overshoot due to labor market slack.

Rising inflation expectations have accounted for a good amount of the move in nominal yields. Harms pointed out that this appears different from the taper tantrum, when real yields drove the rise in nominals.

We will likely be in for an extended accommodative monetary policy environment. Harms argued that major central banks are unlikely to move rates higher any time soon as policy support backstops has been persistent to support the coronavirus-ravaged global economy.

Harms also projected that yields will continue their upward movement but at a slower pace. Additionally, he pointed out that emerging market rates have been offering significant yield advantage relative to developed market rates.

As a way to better-manage fixed income exposure in the current market environment, investors can turn to actively implemented quantitative strategies that try to provide better exposure to the changing market conditions. For example, Natixis Investment Managers offers the actively managed Natixis Loomis Sayles Short Duration Income ETF (NYSEArca: LSST).

The Natixis Loomis Sayles Short Duration Income ETF is supported by Loomis Sayles’ global research platform, which combines top-down macroeconomic analysis with bottom-up security selection. LSST provides dynamic, active approach to sector allocation and security selection by a highly experienced portfolio management team supported by the depth and breadth of Loomis Sayles credit and securitized research. The ETF will try to achieve current income consistent with preservation of capital by investing in fixed income securities such as bonds, notes, and debentures, as well as other investments, with an average duration between one and three years.

When deciding which securities to buy and sell, Loomis Sayles will consider a number of factors related to the bond issue and the current bond market, including the stability and volatility of a country’s bond markets, the financial strength of the issuer, current interest rates, current valuations, and Loomis Sayles’ expectations regarding general trends in interest rates. The active ETF managers will also consider how purchasing or selling a bond would impact the portfolio’s risk profile and potential return.

Financial advisors who are interested in learning more about active bond strategies can watch the Tuesday, May 18 webcast here.