Short-Term Bond ETFs Play a Role in Any Environment

Short-term bond ETFs can do more than just help fixed-income investors limit the negative effects of rising interest rates on a bond portfolio.

“An allocation to the short end of the yield curve can play an important role in an investor’s portfolio in a variety of interest-rate scenarios and economic environments. When rates are rising, shorter maturity issues allow for the potential of prompt reinvestment at higher rates. In a slow growth environment, short duration portfolios can typically offer investors seeking shelter from equities higher income alternatives than most cash investments. In a slow growth environment, short duration portfolios may offer a higher-income alternative than most cash investments for investors who are seeking shelter from equities,” Natixis Loomis Sayles portfolio managers, led by Christopher T. Harms, said in a research note.

For example, the actively managed Natixis Loomis Sayles Short Duration Income ETF (NYSEArca: LSST) is supported by Loomis Sayles’ global research platform, which combines top-down macroeconomic analysis with bottom-up security selection. The Loomis Sayles Short Duration Income ETF will try to achieve current income consistent with preservation of capital by investing in fixed-income securities such as bonds, notes and debentures, as well as other investments, with an average duration between one and three years.

Factors Relating to Current Bond Market

When deciding which securities to buy and sell, Loomis Sayles will consider a number of factors related to the bond issue and the current bond market, including the stability and volatility of a country’s bond markets, the financial strength of the issuer, current interest rates, current valuations and Loomis Sayles’ expectations regarding general trends in interest rates. The active ETF managers will also consider how purchasing or selling a bond would impact the portfolio’s risk profile and potential return.

Bond investors who are concerned about navigating a rising rate environment may also rely on the actively managed strategy to adapt to changing market conditions.

“In terms of investment vehicles, gaining exposure to short-duration assets through an actively managed ETF may potentially offer investors an opportunity to outperform an index and can provide trading and holding period flexibility,” according to Natixis Loomis Sayles

LSST has a 0.38% net expense ratio, a 2.72% 30-day SEC yield and a 1.87 year effective duration.

For more information on the fixed-income space, visit our bond ETFs category.