Is Short Duration the Best Way to Invest in the Bond Markets Right Now?

Given the Federal Reserve’s turnaround from its rate-hiking measures in 2018 to its rate-cutting in 2019, it’s difficult to implement a bond strategy without knowing what the central bank will do in the future. In this current market environment, is short duration the way to go?

It’s a pertinent question given the current market where bond ETFs are seeing more attention than ever before.

“It has taken a long time for bond ETFs to begin getting even a tiny bit of the attention stock ETFs have gotten, but the trend has finally taken hold in earnest, and that’s good news for investors,” a Nasdaq report noted. “While active bond funds have done well in recent years (perhaps due to it being considered easier to outperform a bond index than a stock index), bond ETFs have now started to surpass them in growth. This is adding much more liquidity to bond funds, which benefits investors substantially. Both active and passive bond funds have taken in over $200 bn each in 2019.”

What’s the best way to invest in the bond market given the current conditions? One way is via short-term bonds, which give investors exposure to fixed income without assuming the higher duration risk of longer-termed bonds.

“We typically invest in shorter maturities of seven years or less and caution clients about going out too far on the yield curve,” said Viraj Desai, senior manager of portfolio construction at TD Ameritrade, in a U.S. Money & World News report. “The run-up in bonds this year is mostly due to the Fed cutting rates three times due to a slowing economy.”

With the short-term rate adjustments being instituted by the Federal Reserve, investors can limit exposure to long-term debt issues and focus on maturity profiles. An example would be the SPDR Portfolio Short Term Corp Bd ETF (NYSEArca: SPSB), which seeks to provide investment results that correspond to the performance of the Bloomberg Barclays U.S. 1-3 Year Corporate Bond Index.

SPSB invests at least 80 percent of its total assets in securities designed to measure the performance of the short-termed U.S. corporate bond market. Ideally, shorter-term bond issues with maturities of three to four years are ideal to minimize duration exposure should the bull market enter a correction phase.

“Investors with shorter time horizons may benefit from higher allocations to bonds and vice versa,” Desai says.

Another short-term bond ETF option is the iShares 1-3 Year Credit Bond ETF (NASDAQ: CSJ), which tracks the investment results of the Bloomberg Barclays U.S. 1-3 Year Credit Bond Index where 90 percent of its assets will be allocated towards a mix of investment-grade corporate debt and sovereign, supranational, local authority, and non-U.S. agency bonds that are U.S. dollar-denominated and have a remaining maturity of greater than one year and less than or equal to three years–this shorter duration is beneficial during recessionary environments.

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