For this episode of ETF 360, ETF Trends’ CEO Tom Lydon speaks with Dave Plecha, global head of fixed income at Dimensional Fund Advisors, to discuss current advisor sentiment around inflation and portfolio strategies.
Plecha reiterates that inflation is heavy on advisors’ minds, but he believes that where we currently are within the interest cycle is already priced into markets by investors who are reacting to data as it is released. Instead, he believes that the most important focus should be on the client and their needs within the fixed income portion of their portfolios, and how to best meet those needs.
“The advisor knows that client and knows their level of risk tolerance. So there’s going to be clients that are risk-averse, and there’s going to be more risk-tolerant, and I always say there’s no right or wrong to that,” explains Plecha.
Dimensional offers a variety of funds that cater to a range of risk tolerances, from low-duration options for clients who are more risk-averse with the Dimensional Short-Duration Fixed Income ETF (DFSD) to those that offer longer duration and credit exposure for clients who have a higher risk tolerance in seeking larger returns with products like the Dimensional Core Fixed Income ETF (DFCF). Other strategies offered also include those with exposure to munis with the Dimensional National Municipal Bond ETF (DFNM) as well as those focused around protecting for inflation with the Dimensional Inflation-Protected Securities ETF (DFIP).
“There’s always going to be chatter in the market about something, whether now it’s inflation or the Fed cycle, but I think if the investment horizon is properly set long enough, then you act above that level of chatter and get the right allocation for your client, and that’ll meet the client’s objectives,” Plecha discusses.
Dimensional takes the approach that the two primary drivers within fixed income are the term dimension (whether buying longer versus shorter bonds, for example) and the credit dimension (buying varying levels of accredited bonds). Plecha explains that decades of research have shown that investors can achieve higher expected and realized returns over longer time horizons on an upwardly sloping yield curve. When the yield curve is flat or downward sloping, longer time horizons do not equate to better returns, and therefore shorter-duration investing makes more sense.
On the credit side, Plecha discusses how credit spreads vary over time in the markets.
“When we see wide credit spreads, on average we expect larger, excess returns for credit over Treasury, and we have realized those through time,” Plecha explains. “When credit spreads are narrow, that excess return gets smaller, so we’ll vary; we’ll lean more into credit when credit spreads are wide, and we’ll back away from credit when credit spreads are narrow.”
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