Updated Wednesday, June 14 – 2:45pm EDT
With the Federal Open Market Committee (FOMC) announcing an interest rate hike today, fixed income investors are reminded that this remains a challenging environment for bonds and that alternatives to the widely followed Bloomberg Barclays U.S. Aggregate Bond Index are worth considering.
Some exchange traded funds, including active ETFs, offer broad-based fixed income exposure while moving away from the prosaic approach found in the Bloomberg Barclays U.S. Aggregate Bond Index, also known as “the Agg.” That includes the SPDR DoubleLine Total Return Tactical ETF (NYSEArca: TOTL).
TOTL is an actively managed ETF backed by bond guru Jeff Gundlach and is also seen as an ETF adaptation of the flagship DoubleLine Total Return Fund (DLTNX).
TOTL provides a higher yield and lower duration than the benchmark Barclays U.S. Aggregate Bond Index, with a smaller standard deviation. Additionally, the active ETF has a greatly diminished exposure to U.S. Treasuries while over-weighting agency MBS, non-agency debt, emerging market bonds, bank loans and high-yield, among others.
“But today, relying on the Agg for fixed income exposure is the equivalent of using a rotary phone in a smartphone era,” said State Street in a recent note. “Given the sheer size of the US Treasury market, the Agg has always had an implicit Treasury tilt. But as shown below, this tilt has become amplified since the financial crisis.”
The Agg as been the go-to benchmark for many fixed-income investors. The benchmark tracks U.S. investment-grade corporate bonds, mortgage-backed securities and U.S. Treasuries. However, potential investors should note that the index excludes municipal bonds, Treasury inflation-protected securities and high-yield debt.
As the Federal Reserve looks to normalize interest rates, bond ETF investors have shown greater interest in actively managed options that could better adapt to the higher rates.
“While Treasuries and related government debt have low credit risk by nature, the Agg’s high concentration of government holdings greatly increases its interest rate risk,” according to State Street. “As the Agg’s duration has spiked—recently surpassing six years for the first time in history—its yield has plummeted. Given that yield has historically translated into returns, this means Agg investors are accepting less return for a higher amount of risk—quite an asymmetrical risk/return profile, in a time where macro forces have raised uncertainty and caused spikes in bond market volatility.”
TOTL, which holds almost 630 bonds, has a modified adjusted duration of 4.4 years. The ETF’s 30-day SEC yield is almost 2.8%.
For more on bond ETFs, please visit our fixed income category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.