The evolution of fixed income in the exchange-traded fund (ETF) space has undoubtedly opened doors for investors to provide easy access to this asset class. Now, investors have a plethora of options when it comes to the bond market, especially with the advent of fixed income ETFs.
For investors looking to add exposure to the bond market while reaping the benefits of doing so through the ETF wrapper, it can be daunting to look at the options available. Invesco’s Senior Fixed Income Strategist Timothy Urbanowicz discussed the current state of the fixed income market and how investors can position themselves to take advantage of this growing space.
Fixed Income Inflows Still Strong
As investors are well aware after last year, volatility makes for a challenging environment in the equities market, but a safe-haven move to the fixed income market was a boon to inflows. Thus far in 2019, equities are rebounding, but the strength in the bond market is still persisting with fixed income ETFs still receiving steady flows.
“We got almost $74 billion of total ETF inflows already for the year–almost 40 of that has gone into fixed income,” said Urbanowicz.
The move to bonds near the end of 2018 was seen as a defensive move amid a bevy of sell-offs in equities, but a more dovish central bank is also fueling the current capital allocation into fixed income. Despite the Fed taking on a more dovish tone as it preaches patience with respect to interest rate policy in 2019, investors are still opting for more exposure to fixed income.
However, investors with a penchant for yield have found that the current environment presents more of a challenge as the central bank is less inclined to step on the accelerator pedal on rate hikes and opting to keep the federal funds rate steady.
“That investor hunger for yield seems to be very challenging once again,” Urbanowicz acknowledged.
Where the Opportunities Are
Given the current challenges, where are the opportunities in fixed income? Urbanowicz is seeing the lion’s share of capital allocation spread across investment grade and high yield debt — a shift by investors pursuing a more risk on strategy as opposed to last year’s risk off mindset.
“In our lineup, the predominant driver of Fixed income inflows has been money coming into the investment-grade and high-yield BulletShares ETFs,” said Urbanowicz.
To that end, investors who still want to appease their appetite for yield can look at Invesco’s roster of high yield ETFs:
- Invesco Corporate Income Defensive ETF (NYSEArca: IHYD)
- Invesco Corporate Income Value ETF (NYSEArca: IHYV)
- Invesco BulletShares 2018 High Yield Corporate Bond ETF (NYSEArca: BSJI)
- Invesco BulletShares 2023 High Yield Corporate Bond ETF (NYSEArca: BSJN)
- Invesco BulletShares 2022 High Yield Corporate Bond ETF (NYSEArca: BSJM)
- Invesco BulletShares 2024 High Yield Corporate Bond ETF (NYSEArca: BSJO)
- Invesco Fundamental High Yield Corporate Bond ETF (NYSEArca: PHB)
- Invesco BulletShares 2025 High Yield Corporate Bond ETF (NYSEArca: BSJP)
- Invesco BulletShares 2026 High Yield Corporate Bond ETF (NYSEArca: BSJQ)
- Invesco BulletShares 2019 High Yield Corporate Bond ETF (NYSEArca: BSJJ)
- Invesco BulletShares 2021 High Yield Corporate Bond ETF (NYSEArca: BSJL)
- Invesco BulletShares 2020 High Yield Corporate Bond ETF (NYSEArca: BSJK)
Even with the bond market facing headwinds, investors are not ready to tamp down their exposure to fixed income. Whether it’s inverted yield curves, lower interest rates or concerns that BBB investment-grade debt is on the cusp of high-yield status, investors are still forging on with fixed income exposure.
“At the same time, investors need yield especially as we’ve seen rates come down,” said Urbanowicz.
Urbanowicz acknowledges this wall of worry, but maintains faith in the bond markets, especially high yield where it has become a prime option for income-producing assets over loans.
“A lot of the demand last year was in the loan market as you started to see rates rise,” said Urbanowicz, who is now seeing “a shift out of loans into high-yield bonds.”
Getting More Strategic with Fixed Income
As markets have cycled out of the growth and momentum-fueled investments of 2018, a move to more quality-oriented investments are in order. Identifying these quality-based investments, however, will require more due diligence.
“There’s obviously been a shift into quality,” said Urbanowicz. “You saw that all last year where investment grade took in 106 percent of total fixed-income ETF flows last year. You saw that de-risking across the board–we are seeing investors add risk back on.”
Learning to feather that risk in the current market landscape will certainly require discipline by the bond investor. In essence, bond portfolios will have to be built with a strategic bent–investors can opt for the bond strategies Invesco puts forth via their ETFs to aid in the quest for income.
That strategic allocation into fixed-income means that investors should also look overseas for opportunities. While it’s tempting to simply allocate capital into the domestic bond markets, investors shouldn’t ignore the international credit markets, especially with countries like China becoming less stringent with respect to foreigners accessing their once hard-to-penetrate markets.
Investors looking for overseas debt exposure can look to the Invesco Emerging Markets Sovereign Debt ETF (NYSEArca: PCY). PCY tracks the investment results of the DBIQ Emerging Market USD Liquid Balanced Index, which measures potential returns of a theoretical portfolio of liquid emerging market U.S. dollar-denominated government bonds.
“One of the challenges we’ve seen with EM is with the strong dollar–if you do continue to see the Fed pause, maybe start to some weakness creep in to the dollar, this could potentially be a very nice tail wind for emerging markets,” said Urbanowicz.
Learn More About Fixed Income at the Virtual Summit
Urbanowicz is just one of the speakers who will be discussing the bond markets at the Virtual Summit on Wednesday, Apr. 17, 2019. ETF Trends will give financial advisors the opportunity to congregate in a cutting edge virtual setting to discuss these latest trends in the fixed income space.
Topics Discussed to Address Fixed Income Strategies for a Changing Debt World:
- Advantages of global income diversification
- How indexing and fixed income work together in today’s portfolios
- Assessing the monetary policy of the Federal Reserve and Central banks around the world
- How to position fixed income strategies in an investment portfolio while controlling risk
Register now to take advantage of this opportunity to gain valuable insight into the fixed income market.