Fixed Income ETF Strategies for Interest Rate Volatility | ETF Trends

Fixed income ETFs investors are looking to Invesco’s BulletShares ETF suite as a targeted play to potentially protect their portfolios regardless of rising or falling rates.

Jason Bloom, Director, Global Macro ETF Strategy at Invesco, said bond laddering is a strategy investors should be keeping an eye on in this current rate environment.

“Bond laddering is a simple strategy that is commonly deployed by fixed income investors,” Bloom said. “A laddered portfolio consists of bonds with varying terms to maturity, often with a consistent period of time between each maturity. By creating such a portfolio, an investor will have bonds maturing periodically, allowing the proceeds to be reinvested into new bonds, held as cash in the account, or invested into some other instrument. Bond ladders allow investors to target precise spots in a total return, with respect to each specific maturity they own, thereby removing the need to time the movement of interest rates.”

For example, a few years ago, interest rates had been rising steadily and the belly of the yield curve was significantly underperforming. If an investor was in an intermediate term fund, they would have been lagging the market for over a year, but if they had incorporated a bond ladder holding short, intermediate and longer maturity bonds, they could have been less impacted by the uneven movement of interest rates.

BulletShares are well suited to both rising and falling rate environments. If held to maturity, the ETFs’ total returns are relatively insulated from movements in market interest rates, giving investors a higher degree of control over returns than that offered by traditional bond funds.

There are many potential roles for BulletShares in a portfolio. For investors transitioning from a portfolio of active managers, BulletShares could be used to directionally tilt an investment portfolio up or down in duration or quality. For investors transitioning into ETFs more broadly, BulletShares are often used as the core of their fixed income portfolio—often times alongside an  actively managed alpha driver.

Invesco BulletShares Municipal Bond ETFs offer a hold-to-maturity strategy that can potentially shelter investors from future interest rate volatility. These are investment grade muni portfolios that offer maturities from 2021 to 2029, allowing investors to target precise opportunities on the yield curve or ladder portfolios to maximize diversification. The BulletShares muni suite currently offers historically compelling spreads over treasury bonds—especially on a taxable-equivalent-basis.

The Invesco BulletShares High Yield Corporate Bond ETFs provide a spectrum of choice,  offering maturities from 2020-2027. Clients can target specific maturities to potentially capture opportunities across the yield curve or ladder their portfolios to maximize maturity diversification. With treasury yields near all-time lows, and investment grade corporate bond yields depressed, we believe the high yield corporate BulletShares currently offer an attractive return profile.

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