How to Lower Duration With Corporate Bonds

Investors looking for the income benefits of investment-grade corporate bonds while limiting duration risk have plenty of options to consider in the world of ETFs. The WisdomTree Fundamental U.S. Short-Term Corporate Bond Fund (CBOE: SFIG) uses a fundamentally-weighted approach to deliver corporate bond exposure with less duration risk.

Bond funds hold a collection of debt with varying maturities, buying and selling debt securities to maintain their short-, intermediate- or long-term strategy. When it comes to bond ETFs, investors should look at the duration, or a bond fund’s measure of sensitivity to gauge their investment’s exposure to changes in interest rates – a higher duration means a higher sensitivity to shifts in rates.

WisdomTree has identified deteriorating cash flows, rising leverage and weakening profitability compared to peers as effective markers for potential credit concerns. WisdomTree believes eliminating these issuers can generate a considerable improvement in the strategy’s downside risk protection.

“At the short end of the curve, spreads tend to be much more driven by economic fundamentals,” said WisdomTree in a recent note. “For this reason, we believe that investors concerned about the relationship between credit spreads and issuance should bias their portfolio to the shorter end.”

SFIG’s Utility

Bond ETF investors can move down the yield curve with shorter duration bond funds. Duration is a measure of a bond fund’s sensitivity to changes in interest rates, so a shorter duration reflects a lower negative response to higher interest rate.

SFIG’s effective duration is just 2.36 years, but its 30-day SEC is still solid at 3.04%.