While third-quarter earnings have propelled the S&P 500 to a new high, investors still need bond exposure, but for investors who don’t want to allocate funds into various types of debt, they can look to a standalone option like the iShares Edge U.S. Fixed Income Balanced Risk ETF (BATS: FIBR).
“This could serve as a stand-alone core bond allocation, but it probably won’t diversify stock risk as well as an Aggregate Index tracker,” said Alex Bryan in Morningstar.
“This fund targets an equal risk contribution from credit and interest-rate risk,” said Bryan. “So, it takes greater credit risk than most investment-grade-focused portfolios and less interest-rate risk. While it should deliver attractive performance over the long term, it will likely underperform during economic downturns, as rates tend to fall and credit spreads tend to widen during those times.”
Yield has been hard to come by as of late and with more yield comes the prospect of taking on more risk via duration. With a focus on quality and rate risk, FIBR gives investors a balance of these factors in one ETF.
“This strategy sizes its sector allocations so they each contribute an equal amount of estimated risk to the portfolio,” Bryan said. “This is an important departure from traditional portfolio construction, where diversification is often measured by the dollar value invested in each position and sector. The trouble with this approach is more-volatile positions account for a disproportionate share of a portfolio’s risk, so the dollar allocations may not paint an accurate picture of where a portfolio’s risk is coming from.”
“Risk is tough to measure precisely,” Bryan added. “However, the fund uses volatility over the past 24 months as a proxy. It starts by sizing positions across five U.S. bond sectors: mortgage-backed securities, high-yield bonds rated BB, high-yield bonds rated below BB, investment-grade corporate bonds with one to five years until maturity, and investment-grade corporate bonds with five to 10 years until maturity.”
Investors who do want aggregate bond exposure can opt for the iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG). AGG can offer investors the following:
- AGG seeks to track the investment results of the Bloomberg Barclays U.S. Aggregate Bond Index.
- The index measures the performance of the total U.S. investment-grade bond market.
- The fund generally invests at least 90% of its net assets in component securities of its underlying index and in investments that have economic characteristics that are substantially identical to the economic characteristics of the component securities of its underlying index.
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