Live at Exchange: Your Fixed Income Playbook for 2022 | ETF Trends

Fixed income is an important part of an investor’s portfolio, but with so many products on the market, it can be difficult to determine the right place to allocate funds. 

It doesn’t help that fixed income offerings, traditionally, just aren’t as flashy or exciting as their equities peers. But considering the current market conditions and headwinds for 2022 — rising interest rates and rising inflation — makes it even more important to find the right fixed income product for your portfolio.

“Bonds are a little bit like the Delaware of investing; they’re supposed to be boring. You use them for diversification, you use them for steady, reliable income,” Lara Crigger, editor-in-chief of ETF Trends and ETF Database, said today at Exchange: An ETF Experience.

Bonds, however, are in their worst sell-off in decades, and U.S. Treasuries just suffered their worst quarter since 1973, Crigger said.

The most important thing to remember about bonds right now is that there’s still income to be found,” Crigger said. “In the fixed income market, there are still opportunities to be found in bonds. Think outside total market exposure and the Agg.”

Crigger’s first solution: Reduce the duration of your fixed income investments to reduce interest rate risk. 

Products named by Crigger as strong offerings to reduce duration risk include the iShares Short Treasury Bond ETF (SHV), the Vanguard Ultra-Short Bond ETF (VUSB), the Invesco Ultra Short Duration ETF (GSY), and the JPMorgan Ultra-Short Income ETF (JPST).

More solutions to hedge high yield are the WisdomTree Interest Rate Hedged High Yield Bond Fund (HYZD), the ProShares High Yield-Interest Rate Hedged ETF (HYHG), and the iShares Interest Rate Hedged High Yield Bond ETF (HYGH).

“We’ve actually seen flows into high yield get creamed this year, with billions flowing out of the space. So why would I be telling you to do that?” Crigger asked the audience at Exchange: An ETF Experience. 

“I think you can do high yield,” Crigger added. “Get a buffer with a little bit more of a cash flow to offset the falling bond prices, but you want to be smart about it. Again, I’m going to say short term is the way to go here.”

Consider Floating Rate Debt

A third option to consider is floating rate debt, such as the WisdomTree Floating Rate Treasury Fund (USFR), the iShares Floating Rate Bond ETF (FLOT), the VanEck Investment Grade Floating Rate ETF (FLTR), the Invesco Senior Loan ETF (BKLN), and the SPDR Blackstone Senior Loan ETF (SRLN).

Floating rate bonds, according to Crigger, respond to the movement of interest rates, whether they are rising or falling. Thus the instrument shifts and adjusts to whatever interest rates are doing.

TIPS, the last solution discussed, have served as a popular way for investors to hedge against inflation.

There’s an adage that by the time you think of getting into TIPS, it’s already too late, so there’s a little bit of a debate, but it’s the obvious one because it has inflation protection right there in the name,” Crigger said.

Short-term TIPS offerings include the Vanguard Short-Term Inflation-Protected Securities ETF (VTIP), the iShares 0-5 Year TIPS Bond ETF (STIP), and the FlexShares iBoxx 3-Year Target Duration TIPS Index Fund (TDTT).

Preferred options include the VanEck Preferred Securities ex Financials ETF (PFXF), the John Hancock Preferred Income ETF (JHPI), and the Virtus InfraCap U.S. Preferred Stock ETF (PFFA).

Finally, Crigger points to tax loss harvesting, an attractive resource that many investors may be missing out on. 

“If you’re not tax loss harvesting, consider doing that right because you can turn lemons into lemonade,” Crigger said. “It’s not a thing that has to wait until April 14 or whatever. It’s a great way to take a losing position and swap to an ETF that has a similar exposure and harvests that loss for taxes and save your clients a lot of money.”

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