The U.S. Federal Reserve has time on its side when it comes to adjusting monetary policy in order to counter rising inflation. Fixed income investors don’t have the same luxury, but can mitigate rate risk with a short-term strategy. As mentioned, rising rates won’t go away anytime soon. Global investment firm Goldman Sachs is already forecasting more rate hikes as economic growth remains robust.
“In light of the stronger growth and firmer inflation news, we are adding a 25bp (basis points) rate hike in June to our Fed forecast, for a peak funds rate of 5.25-5.5%,” said Goldman Sachs economists led by Jan Hatzius in a note.
As mentioned, implementing a short-term strategy can help when the Fed continues to raise rates. Additionally, an active strategy can help with adding a more dynamic component when market conditions warrant adjustments to holdings on the fly.
These characteristics are inherent in the Avantis Short-Term Fixed Income ETF (AVSF) and the American Century Short Duration Strategic Income ETF (SDSI). In terms of yield, the former carries a 30-day SEC subsidized yield of just under 4.5% while the latter carries a yield of 4.99% (both as of January 31).
Active and Diversified Short-Term Fixed Income
AVSF invests primarily in investment-grade quality debt obligations from a diverse group of U.S. and non-U.S. issuers with shorter maturities. The fund’s portfolio managers seek bonds with high expected returns through a process that uses an analytical framework, which includes an assessment of each bond’s expected income and capital appreciation.
AVSF, which carries an expense ratio of 0.15%, has debt holdings of various maturities, but with an average duration of 2.44 years. Versus a an ultra-short fund, this allows a fixed income investor to go farther out on the duration scale in order to extract more yield.
With an expense ratio of 0.32%, SDSI seeks income and, as a secondary objective, long-term capital appreciation. The strategy will seek to generate attractive yield by investing across multiple fixed income market segments, which maintain a short duration focus.
The fund invests in both investment-grade and high-yield, non-money market debt securities of varying maturities that average just under 2 years. These securities may include corporate bonds and notes, government securities, and securities backed by mortgages or other assets.
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