A Fixed Income Investing Approach Following Fed Rate Hike

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.”